Greetings, and welcome to the Starwood Property Trust's Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. At this time, I would like to hand the conference call over to Zach Tanenbaum, Head of Investor Relations. Zach, 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, 2024, 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. A 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; and Rina Paniry, the Company's Chief Financial Officer. With that, I will now 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 $0.48 per share. GAAP net income with $78 million or $0.24 per share. Across businesses, we committed to $925 million of new investments this quarter. As a testament to the diversity of our platform, 62% of our investing was in businesses other than commercial lending, which now makes up to 57% of our assets. I will begin this morning with commercial and residential lending, which contributed DE of $189 million to the quarter, or $0.58 per share. In commercial lending, we originated $353 million of loans, of which we funded $284 million and an additional $113 million on pre-existing loan commitments. Repayments for the quarter totaled $606 million, nearly half of which were office. We had another $624 million of repayments in July for a year-to-date total of $2.1 billion. On the subject of credit, our $14.7 billion loan book ended the quarter with a weighted average risk rating of 3.0, up from 2.9 last quarter. The vast majority of our borrowers continue to support their assets, investing nearly $2 billion of fresh equity since the beginning of last year. In addition, 97% of our performing loans have some form of rate protection in place, either via rate caps, which have an average base rate of 3.2%, interest reserves, guarantees, or a fixed rate of interest. Jeff will cover our risk rating changes in greater detail, including two loans placed on nonaccrual in the quarter. One was a $46 million multifamily loan in Phoenix that we downgraded from a 4 to a 5, and the other was a $57 million multifamily loan in Fort Worth, which was downgraded from a 3 to a 4. As we signaled last quarter, we foreclosed…

Thanks, Rina. As we approach our 15th anniversary this month, we're the longest-standing commercial mortgage REIT of our post-GFC peer group and the only company who has never cut its dividend. We built a diversified, low-leverage business positioning us to outperform regardless of market cycle. Our inception-to-date return of over 10% per year is higher than the Equity REIT Index and more than double the mortgage REIT index in that time. Even though we have the best valuation in our sector, the market has only given us partial credit for this diversification and for the over $4 per share in unrealized DE gains. As I will discuss shortly, those gains, which provide a unique safety net to ensure our dividend paying ability, are likely significantly higher. 15 years later, we aren't really a mortgage REIT anymore. The 10-year has rallied 75 basis points since we last spoke, and forward SOFR is now indicating 165 basis point reduction in the Fed funds rates by March, both of which are very good news for CRE credit as they provide relief both through cap rate compression and improved debt service coverage ratios. As Rina shared, our sponsors have contributed nearly $2 billion of fresh equity on our $14.7 billion CRE loan book since last year. When rates move like this, we typically see borrowers step up and support their assets more aggressively, and I would expect that continues. We have spoken often about loans on U.S. Office, which are 10% of our assets, but this rate move will mostly help other sectors or our loan book more, like multifamily, which is 21% of our assets and has a blended 6.3% debt yield across 70 loans, and hospitality, which is 8% of our assets and has a blended 11.4% debt yield across 20 loans.…

Thank you, Jeff. Thanks, Rina. Thanks, Zach, and good morning, everyone. Interesting, where do you start a call in commercial real estate today, we just had a seminal event, sort of an earthquake in the credit markets and the financial markets with the jobs report coming in so much lower than most people thought. And I think most of you know I've been super critical of how we had inflation because we had too few goods on the shelf and too much money in consumers' hands, and that situation was going to clear itself and it obviously has. And then we have an economy that's been driven by segments of employment growth that it can't impact. And in the 115 or so thousand jobs created, 55,000 of those jobs were in health care. Since May of 2022, since it started to increase rates, those industries, health care, education, and government, completely not impacted by its rate effort, added 3.25 million jobs. So what you're seeing now is why you have this selection set up the way it is. You have people not feeling good about an economy, even though people aren't employed, because what's driving GDP is a very narrow segment of the economy. Data centers, of which Starwood Capital is a major player on fire, and alone fit as a single package and unique to the United States in propelling our GDP growth faster than our peers. Because the scale of the AI investments, both in chips and in infrastructure and power and data centers, and it is quite an enormous effort, which sits on top of the CHIPS Act, on top of the infrastructure bill, and on top of the climate bill, which all contributed to the second largest category of employment increase last month. Construction jobs, up…

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

Thanks, everybody, for taking my question. Look, ultimately credit is always a function of willingness to pay and ability to pay. And I'm curious given the quality of the sponsors underlying your loans, if the shift that you're looking at right now is about willingness to pay and is this really sentiment driven given the really radical shift in terms of forward rate expectations as we move into '25?

I think it's too early to tell, this just happened. So, I mean, people are being constructive but ourselves as an equity player, when we're looking at restructuring or carrying an asset, I mean, we will -- we're looking at a forward curve that has moved dramatically, and the 10-years moved dramatically and nobody expected that. Most people expected the 10-year to sit at four with our deficit from as far as the eye can see. I don't know if that's a technical trade or actually the new reality of people [technical difficulty] short end is super important and for our borrowers. And I'd expect that this will on the margin help materially in their desires to stay alive until '25. I think you can, like I said, you can now see. Don't forget, like, you go back 2 months and heads of the major banks are saying no rate cuts this year at all. They're also saying some people, a small minority, were talking about rate hikes. So this is the [indiscernible]. You've seen that this economy is super narrow. The GDP is being driven by centers and spending on stuff that the average person doesn't feel. And so they don't feel like this economy is working for them. Their wages are marginally above inflation now, like 3% and falling, and none of us feel pressure in the job market the way we did in the craziness of the pandemic. So -- and immigration, both legal and illegal, has helped the picture on the employment side, and we'll see what happens. I mean, obviously, the election itself will have some consequences for the labor market if there are deportations and things like that. So, we'll have to see how that plays out.

Rick, I'll add that our seats reserve is up to $380 million. So our optimism on rates, and it's really the last couple of weeks that this optimism has taken shape, as Barry spoke about, is not really reflected. We're still looking at every asset. There are a lot of knife [ph] fights out there, and we are not going to put optimism into our reserve expectations and our CECL reserve has still gone up. Clearly what we've seen in the last couple of weeks, if that holds, you could see things turn around, but we're not baking optimism into our financials today.

Got it.

It's so nuanced, by the way, because if you have an office building and it's a [indiscernible] yield and its 55%, 60% leased, you're looking at higher rates and negative returns as far as I can see, you're not going to invest in the office thing. And that's the biggest issue in the office market. Are you going to put the TI in for the tenant that wants to move in? And how sure can you be of the exit cap? And every office borrower in the country is looking at their assets, maybe not their REITs because they don't sell assets and they just want to keep them alive. But all the private owners of real estate, including the household things you talked about, like the best borrowers, everyone has decided that there isn't a PE -- real estate PE firm in the country that hasn't walked away from an office building. I mean, everyone, ourselves, Blackstone, Brookfield, every single person has walked away from properties saying, this is throwing good money after bad money. But the market will bifurcate exactly like the mall [ph] market did, where the B's and C's had a tough time getting financing, sell at 12 caps, and the good malls are still getting finance from the C and the S market using 5 or 6 cap rates now on the malls, and they're actually performing. They're performing [indiscernible] yesterday. But the office markets will become obvious that the best buildings in the best -- in the right cities are full, even in the United States, and they're commanding decent rent, [indiscernible], for example. I don't know if that's [indiscernible] assets. And then there are buildings in New York that are completely empty. They're trading for $100 a foot because what one was on the ground lease, others are kind of like, you got to do something. It's just field value and land value. That's on the residual scrap model. These buildings have to come down. So -- or find some use that, but nobody's figured it out yet. And it's going to be in the office markets, it's going to be a while. It's going to take time and it's not just rates. I would say rates impact every other asset class in real estate. Office has a different situation in the U.S., different in [technical difficulty].

Look, it's an interesting distinction versus what you said about multifamily where you basically said, hey, we'd be happy if everybody sold us everything at our basis right now. So I suspect there's going to be a pretty huge divergence between what you see going forward on the properties.

Huge, huge divergence, exactly.

Thank you.

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

Good morning. I wanted to start with originations. I noticed a pretty strong quarter. CRE loans up, infrastructure loans up a good bit from Q1. Can you talk about the pace of originations moving forward as you put your excess liquidity to work? And also, where you're seeing the best returns, do you expect to see opportunities elsewhere, maybe banks more willing to sell now that some of their investments aren't as underwater as maybe 3 or 6 months ago? And kind of how you think about allocation of your excess liquidity into new investments?

Barry, you want me to start? We are seeing consistently higher returns in our energy infrastructure business, and the LTVs are moving in our favor as the demand for power has continued to increase. So I would say that we expect to continue to lean in there. As I look at our, and I believe the next couple of weeks, we're really going to see with this rate move, we're going to see the pipeline for CRE lending pick up even more. But our pipeline has, I would say, tripled over the last three quarters of actionable deals on the CRE side. So there are things to do. Things are becoming unglued and unfrozen, I should say. And I believe that we have the ability to put out a run rate that's probably 2x to 3x the run rate you've been seeing at accretive returns in the similar sort of 11.5% to 13% levered return on the CRE side and significantly higher than that on the energy infra side. We've talked before about the fact that property is very difficult to buy today with negative leverage and cash returns that are mid digits. You're betting too much on the excel spreadsheet allowing you to push rents up, et cetera, so we're probably not increasing much there. We haven't increased the resi book. There are some trades in the resi book that we think are potentially getting closer to interesting. So you could see us put money back to work there at some point. We have been buying a few CMBS [indiscernible] where we think there's great value, and that's also supporting our CMBS originations business. So the two likely places are going to be energy infra, where we're going to continue to lean in, and CRE, where we're seeing a bigger pipeline. Barry, I don't know what you would want to add to that.

I think origination team thinks we have more than a $1 billion of actionable CRE loans that we can do if we want to do them. We're just balancing our needs to actually fix our assets up against a whole bunch of other stuff, but we're doing it with a company that's materially lower leveraged than we've been, 2.2x materially lower, I think, than most any of our peers. And also it's a little nuanced, but we've cut our forward funding obligations from a peak of $3 billion to a $1.2 billion. So we're much more -- in much better shape there that we don't have to fund stuff that we don't want to fund. And that's sort of a nuance, but it's important to the overall picture of how we put out capital. So I think transaction volumes are down like 70%. And the CMBS markets been the only place the financial real estate really has scaled in the last 6 months. Most of our peers and ourselves have been cherry-picking around the edges in private debt and some of the insurance companies are making some loans, and we have our own private debt funds. But because there just aren't that many big transactions to finance, it just hasn't been that rich a population set. So we've had a really hard time finding actionable deals. There's more liquidity or more trades or more lending and smaller assets. But if you're going to apartment building, you didn't want to sell it. It's very public that we lowered redemptions or lowered redemptions materially in our $25 billion [indiscernible] property company. And that was $25 billion basically industrial assets. And we said, we're not going to sell them into a distressed market and we were convinced rates would come down and add enormous liquidity and make our dividend more valuable. And all those things hopefully seem to be -- will come true and then you'll continue to sell assets. But we're not like anyone else, everyone, or just like everyone else. Everyone else says [ph], I don't want to sell this. There's no trade. There's nothing to refinance. There's no new loans. So, you will see the market come on, I said the unglued, but then you corrected on stock. There will be more transactions. You're seeing that already. I actually think you'll see a pretty strong buying appetite for this asset class. The volatility in equity markets reminds people of the compounding nature of real estate, the world's largest asset class. We're not going away. People will have to live somewhere. Most people will travel on vacation, and this asset class is a material component of the world's capital markets, and it's obviously got a different risk profile than a new chip that may or may not live forever or get taken down and go into the way of the dodo bird. So just a different outlook and it'll find favor in a different market.

And Stephen, to repeat something Rina said earlier about things becoming unfrozen, we had $606 million of capital returned in Q2, but we had $620 million of capital returned just in July. So you are definitely seeing a trend with more capital starting to be returned, which means they have the ability to refinance assets away from us. And that is a good part of the unfreezing of the markets, but you're certainly seeing a trend line that is constructive.

Yes. Appreciate the comments. Just a quick follow-up. Barry has been pretty well covered, slowing rent growth that will likely accelerate as the new supply slows. But last quarter you mentioned something that was interesting that insurance costs across multifamily were coming in lower than expected. Can you maybe update us on that and generally kind of how you're seeing expenses run on the multifamily side?

Yes, the pressures on multifamily expenses have come off a bunch. We were down year-over-year on insurance, property insurance, and I'm not sure that was across the United States or given our scale that we pull all our $100 billion plus assets together to get insurance. And I know that at least one other large person has similar insurance, but I can't speak to what small guys are borrowing at. We don't think they have our insurance. So -- but I would say overall our experience has been good. And you can see the -- some of the expenses, like, it's interesting, I was looking at some of the SFR companies, they're all over the place. And we own some of that family [indiscernible] too. So they are all over the place. The states are in different positions with tax increases and real estate tax increases. So I do think you have obviously two states that are running a surplus, a big surplus, Texas and Florida, and two states running a massive deficit, or three, Illinois, New York and California. And so pressure on real estate taxes is really different in [indiscernible] situation of each of the states. So -- and in fact, Texas lowered taxes. They went in and lowered their taxes, which doesn't happen because they should have a gong. I think I've seen that once, twice in 35 years. So it's just state-by-state, and there is even the new construction is so all over the place. The East and West Coast have less construction, the Northeast and New York and California because the growth was in the [indiscernible] states, the Texas, the Georgia, the Tennessee, and the Florida, and they got the bulk -- Raleigh, North Carolina, they got the bulk of the new construction and that's…

Great. Appreciate the comments this morning. Thank you.

Thanks, Stephen.

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

Yes. Commercial real estate has been hit so hard through this cycle, and as you talked about, Barry, kind of unintended consequence. When the Fed does cut, are you thinking that this is sort of a trickle of capital coming in, or do you see more of a meaningful sort of shift in sentiment and cap rates where a lot of players might be just kind of waiting to get confirmation of cuts?

The equity side of real estate is pretty complex. And the areas of the world that were investing heavily in [indiscernible] and real estate funds, in the Middle East with the position of oil and some other issues back home, they're a little less on the margin. They're still investing, but I think not at the pace they were before. Domestic needs have overwhelmed some of the international desires to invest offshore. I think the Koreans and the Southeast Asians who are major players in the markets, I think they'll be induced to invest more heavily. And the U.S market, I'm talking institutional market, will depend on where the stock market is. If the stock market craters, it's obviously the denominator and the portfolio allocations come into play, and they'll be overweight in the property sector. So I do think you'll see individuals show up and high net worths and they're a major force in the market in real estate. But in fact, through this entire cycle, the people most likely buying individual properties with no competition with families. And they were saying, I'm owning this at a six or seven, yes, I know, but I could never get it in a better market and I'm buying it for 30 years. So you've seen guys add real estate, so they're high net worths. And you're talking many institutions, some of these people have enormous balance sheet. So on the whole, I'd say there's a ton of dry powder and there's enough money there to propel the markets higher and create tremendous demand. The REITs will probably, as you can see, the stocks are rising and they get back into the acquisition business. And I'd expect that by the time some of the dry powder is used up, the buckets will…

Thanks.

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

Thank you. Can you give any update on Starwood Solutions? Have you gotten any traction with that? And just the CMBS market, your comments about the banks, I see that market as having the potential to be meaningfully bigger in size post all of this than it was with the banks shrinking, do you agree with that and do you see an opportunity to meaningfully grow both the conduit and the special servicer?

Yes, thanks, Jade. We've had our first couple of clients in solutions. The revenue is still fairly small. We are talking to the potential big players on the government side in a number of ways about potentially helping out there, and those could be the needle movers that we're really playing for, and we'll keep you posted as that goes. I think we've had something like 300 meetings in solutions, and it is starting to grow. So that is good. I would say on the CMBS side, it's been a really interesting market. The banks are very happy to do agent business like CMBS that comes on and leaves their balance sheet fairly quickly. They're more reticent to do portfolio loans. So I don't think the large banks have pulled back and the smaller banks were never big CMBS conduit originators. So our conduit originations pace of a 1.5 billion or 2 billion a year probably maintains in what is today still a smaller market than what it has been. We've seen a shift in the CMBS market. You had a significant bid for 5-year loans. Investors at yesterday's higher rates did not want to lock in 10 years of a high interest rate. And so they really pushed to 5-year loans. Those 5-year loans are available on the fixed rate side through insurance companies. You're seeing a lot of insurance company growth in 5-year fixed rate loans. And the CMBS market has become probably 80% 5-year loans. That was 10% a couple of years ago. So the borrowers have moved in the curve. We're very willing to provide that capital. It's a little bit of a different B piece that ends up coming out. It's a higher dollar price piece. It has less time to accrete back to par,…

Yes, I think the CMBS market is going to grow in size. But the thing is for borrowers, it doesn't work for transitional loans. They have to be cash flowing assets and they also have to be at a certain scale to make them worthwhile given the cost to borrowers of the transaction fees. So the private loans will always sit alongside the CMBS executions. And I do think I've been remarking on some of the deals done that I think have been quite aggressive in the CMBS market, both in coverage ratios and very tight. And I -- but it's been the only way to finance a large portfolio is really through the banks. As Jeff pointed, they're happy to act as conduits, but they're not happy to have this stuff sit on their balance sheet. And there's a lot of pressure from the OCC as they've been for 2 years, 2.5 years to reduce their real estate exposure, which hasn't helped anything, especially with us and other borrowers in our sector who like to get refinanced out. Who's going to take you out? And who takes you out of an office loan today? It's like, who's going to finance it? And I think when I mentioned the markets, I didn't talk about the debt markets for those asset classes. I mean, obviously, a Fannie & Freddie still in the apartment market, but like in the motel market, you're seeing loans 400 over, 450 over, those are loans that we want to do. And they're not as in a borrower wants to borrow back. But if you have a very stable cash flowing hotel, we just refinanced and asked it at 240 over, but I think it was like, if I remember correctly, it's probably 12 or 13 [indiscernible] yield. So, when things are really safe, there's money for it today. And I think this key change, and it has to be a key change in the real estate markets, of a lower rate -- of almost a certain lower rate profile in the future, at least the near future, so next June, is going to mend a lot of issues and be good for the whole industry and for the country frankly. So you didn't want the regional banks to collapse. That wasn't -- and they were a victim of the Fed. Three things benefit, real estate, the treasury because they have to pay less interest expense on 34, 35 [indiscernible] of debt and the regional banks which every drop in rates is an equity infusion into the balance sheet. So there's a triple header of wounded ducks that will be better off. And I just hope you hurry.

And Jade, I'll add that on the solution side, you saw this quarter, I think Rina quoted, that our servicing portfolio increased by $2 billion, but we did have $3 billion transfer out. So we actually added $5 billion of servicing this quarter across six deals, and that's a big part of that as a result of the number of meetings that we've been having on the solution side, which opens the door for other businesses there. And my last thing, when I did talk about conduit, CMBS before, I was talking about fixed rate conduit and not SASB. Certainly, there will be growth in SASB. We are seeing growth in SASB. I think that is what Barry is speaking to as well and I would expect that to continue.

That's right.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the call back over to Barry Sternlicht for any closing remarks.

Thank you everyone for joining us today. It was interesting. We don't often have that much to talk about, but I think we're very happy, given all the issues that the industry face, we're pretty happy we are. Again, I thank our shareholders, the Board, and our really hard working team for executing through this really difficult time that we had nothing to do with. And I'm optimistic about our future and I look forward to getting all the cylinders working again. So pull forward and continue to provide outstanding returns for our shareholders. Thank you so much.

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