Greetings, and welcome to Starwood Property Trust, Inc.'s fourth quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I'd like to hand the conference call over to Zachary Tanenbaum, Head of Investor Relations. Zachary, you may begin.

Thank you, Operator. Morning, and welcome to Starwood Property Trust, Inc.'s earnings call. This morning we filed our 10-Ks and issued a press release with a presentation of our results, which are both available on our website and have been filed with the SEC. Before the call begins, I would like to remind everyone that certain statements made in the course of this call are forward-looking statements, which do not guarantee future events or performance. Please refer to our 10-Ks and press release for cautionary factors related to these statements. Additionally, certain non-GAAP financial measures will be discussed on this call. For a reconciliation of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP, please refer to our press release filed this morning. Joining me on the call today are Barry Sternlicht, the company's Chairman and Chief Executive Officer, Jeffrey 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, Zachary, and good morning, everyone. Today, we reported distributable earnings, or DE, of $167 million or $0.48 per share for the quarter, and $675 million or $2.02 per share for the year. Across businesses, we committed $1.6 billion towards new investments this quarter and $5.1 billion for the full year, with 67% of our annual investing in businesses other than commercial lending. As a testament to our diverse business model, commercial real estate lending now comprises just 54% of our asset base. I will begin my segment discussion with commercial and residential lending, which contributed DE of $193 million to the quarter or $0.55 per share. In commercial lending, we originated $477 million of loans, which brings our full-year originations to $1.7 billion. Repayments totaled $1 billion in the quarter and $3.6 billion in the year. Our $13.7 billion loan portfolio ended the year with a weighted average risk rating of 3.0, consistent with the prior quarter. In the quarter, we foreclosed on three previously five-rated loans totaling $190 million, all of which were multifamily, two in Texas and one in Phoenix. We obtained third-party appraisals for all three assets, with one indicating a value below our basis. We took a $15 million specific CECL reserve against this $46 million loan prior to foreclosure. In total, the three assets had $61 million of lost sponsor equity. As we work to resolve our existing REO assets, we sold our previously mentioned Portland multifamily asset on our DE basis of $61 million. In addition, subsequent to quarter-end, we received $39 million in repayment of a nonaccrual loan secured by a hospital asset in California that was destroyed in the 2020 wildfires. The insurance proceeds were $1 million in excess of our DE basis. And finally, we are under contract to…

Thanks, Rina. We ended 2024 with a flurry of capital markets transactions where we extended the average term on our corporate debt from 2.2 to 3.5 years. Repriced upside and extended $1.4 billion in term loans, extended and upsized our corporate revolver, and issued high yield unsecured debt, all at the tightest floating rate spreads in our company's history. We raised almost $800 million in incremental proceeds in this process. Leaving us with significant investable firepower as we enter 2025. We've seen significant spread compression across our investment cylinders in CRE, EMBS, fifth, residential loan and financing spreads. And in CRE cap rates, where spread tightening has offset most of the rate rise since the election. Liquidity has returned to all of these markets for both new transactions and the refinancing of the record loan originations volume from late 2020 through early 2021, giving us as strong a loan pipeline as we have seen in three years. In Banks continue to earn significantly higher ROEs lending to nonbank lenders like us than making their own direct whole loans to borrowers. They've also reduced the lending spreads to us in line with the spread compression I just spoke about. Allowing us to compete at tighter spreads across our platform on higher quality, low leverage loans at today's lower basis. Which we believe will create outsized opportunities for us in 2025. We've already closed $1.5 billion of loans in the first quarter and our business plan for 2025 is to write the most loans we have in any year since our inception other than 2021. Which was a record year for lenders across the board. Our unique diversified business model has a cycle load debt to equity ratio of 2.1 times today. Leaving us significant room to invest our near record cash…

This is gonna be one of their interesting calls. I posted in ten years. I think we kinda talk about the macros and probably the windshield has never been murkier. The nobody really knows the effect of tariffs or if they're gonna go in or they'll be targeted or broad. But there's one short term conclusion, which is definitely is inflationary. There's only three places the price increases can go. They can go to the manufacturers. They can go to the consumer. They can be split between the two of them. And take steel tariffs, for example. The American producers will raise prices something less than the 25% increase on foreign imports. So I think we'll have to wait and see, and I think I was joking internally for the last nine months. Ninety nine out of a hundred economists would have thought with our deficits, the tenure was going four five to five five and a half and know, Jeffrey Goenke and Jamie Dimon have both been fairly public about significant increases in the tenure, We sit this morning with the tenure at, like, four twenty eight. And, at the huge rally showing the inherent weakness in the US economy. What you're seeing in the US economy is ten percent of the population is spending half the money. And the bottom half is not participating because the AI explosion that has led to commitments close $300 billion from seven companies levered is a trillion dollar It is the same thing as infrastructure bill except it's getting spent much faster. That's the exceptionalism of the US economy. It's not anything else certainly out of I look at just education school system. So we're have a sort of a distorted economy. And you're seeing the consumer sentiment fall because of the…

Thank you. At this time, we'll be conducting a question and answer session. Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you like to remove your question from the queue. One moment please while we poll for questions. Our first question comes from Stephen Laws with Raymond James. Please proceed with your question.

Hi. Good morning. I see few topics I want to hit on with WoodStar. First on the expense side, you know, cost to run our operations a little higher in Q4. Looks like that's been the case the last couple of years. So is that seasonal, and how do we think about that moving forward? And then on the interest expense, what's the remaining term on the the debt there? And how do you think about what that's gonna cost when you look to to refinance that?

Yeah. Thanks, Steven. Appreciate it. You know, we have two and a half years remaining debt there, and we will be opportunistic. We'll go early if the market gives us an opportunity as we always have you look at the way we treated our unsecured debt, where we've gone probably a number of times, we're gonna do the same here when the market gives us a window, but two and a half years is plenty of runway. And and expenses were really up to date because of the hurricane. There was some maintenance that needed to be done, and that that is not run rate, but we expect that will come back to run rate, and as Barry said, with eight percent rent growth and and probably another eight percent coming next year with moderating expenses. I think we feel pretty good. Fifty eight. Twenty five. Yeah. Great. And then, you know, just as I think about the fair value mark, you know, we typically have seen that take place, in the second quarter around those annual rent increases. Now how how do I get my hands around what drove that That valuation gain this quarter And how do I, you know, think about forecasting that as we move forward?

Yeah. Thanks, Steven. I I know it's probably difficult to look at the quarter where the tenure went up in the fourth quarter. I'll I'll note that it's down twenty seven basis points since year end. In the second, third, first, second, and third quarter, we use desktop underwriting. In the fourth quarter every year, get an appraisal. The appraisal is a discounted cash flow method It backs into a four four three cap, which our portfolio premium from the appraisal would be equivalent of a four six eight cap. I have a list of the last twenty trades in this sector in in Florida in our markets. And the last twenty of them for significant size have a four point six percent blended cap. As Barry said, cap rates have come down, and they are coming down, and they're we're seeing spread tightening, and and I would expect they will continue to come down certainly as we look at our desktop mark for next quarter. So being higher than the last twenty trades, which date back to twenty three, and have some of the higher cap rate assumptions in them based on the market being weaker than yeah, we we feel like we are, we're very much in the middle of the range, but the most important thing here is this is an appraisal. Is discounted cash flow method. Looking at assumptions over time. I'll I'll say on top of that, they look at the rent growth for for this year and we only effectively get half of that because it's only for six months. If you take all of that it's, you know, all of that just the three point eight percent that's been held back is worth about nineteen basis points in cap. So if I add sick if I do six months, it's equivalent to ten basis points So the four six eight asset level cap that is effectively used in the appraisal is almost the four Seven eight. So we're eighteen basis points above the average of the last eighteen months, which should have gone down. So while it was tighter than where we were on a desktop base, we feel really comfortable that it is where the market is today at worst.

Our next question comes from Rick Shane with JPMorgan. Please proceed with your question.

Hey, guys. Thanks for taking my question this morning. Look, one of the anomalies in the market is that you guys are one of the opportunities, I should say, in the market is that you guys are trading at a significant premium to virtually all of your peers. And that creates an interesting arbitrage in terms of acquisition. When we normally raise this question, companies' responses, hey. Why do we wanna buy anybody else's problems? But the reality is that giving experience in terms of special servicing. It is analysis that you guys can do really thoughtful, which is probably a lot of loans you've looked at in the past. Does it make sense to scale the business at this point by inorganic opportunities as well as the organic opportunities.

But we're agnostic. I mean, any business plan that needs a return of capital and is accretive, you know, we'll we'll look at. I I wanna say we don't really have any peers. You know, and we pay a whopping dividend and given the diversity of our business model and its historic ability to cover its dividend from for whatever, is it twelve years or something? Thirteen years? I can't even keep track. Two thousand and nine. Fourteen years? Fifteen years? So, I mean, I think, you know, we should be training at eight dividend yield or seven and a half, not not the nine and a half reflects broken companies, basically, that are completely busted or have cut their dividend. There's some of them are not continuing to cover their dividend. So, yeah, I mean, you could say that it's booked, then you have to believe us on our books. And maybe, you know, that is what it is. But the ability to pay a dividend that's too large given the risk inherent in the dividend. I think that pushes us beyond book. And then I think I think if we so that's why I say we're a company, not a REIT. And I know we're a REIT, but it is if you look at it as a company with an efficient tax structure to pay out then we could and should trade away to a to a a a dividend yield that reflects the risk of our business model. And and I I think we have a we're in a really good position and perhaps, you know, there are that we should look at other vehicles, which we have considered spinning out businesses and things, which will not trade at the discount we do. As a book, you…

Guys, look, I I I appreciate your passion on this issue and and I'm not saying it's unfounded, but sort of going back to the original question, Regardless of what your absolute multiple is, it is at a significant premium to these other companies. Call them peers. Don't call them peers. Does it in fact take make sense to take advantage of that potential arbitrage at whatever level and acquire additional assets.

We'd love to acquire other companies at a discount, but they they don't seem to to to wanna do that. So we're gonna we're gonna grow as fast as we can. The the fact is ten percent of our assets are on US office. US office is still difficult. Our peers have significantly higher exposure to US office. So I would say I'd look into why they trade where they do rather than where why we trade where we do. But we should be at a premium.

Our next question comes from Jade Rahmani with KBW. Please proceed with your question.

Thank you very much. Life science has been an area of significant challenge due to oversupply and also The basis. Many of these projects that are spec are being looked at as conversions to office because that's the cheap option. The only problem is the rents are much lower per square foot in office. So could you just discuss the one Life Science downgrade you experienced and what the outlook is there?

Yeah. Thanks, Jade. Yeah. We we we've never really leaned in on life science. We saw all the conversion deals. We ended up doing one loan, and it's under a hundred million dollars. It was in Boston in a great location. In the Seaport. We still like our basis versus today's now lower rates. You know, we if we can sign a lease somewhere near ninety dollars a foot, which we believe the market is ninety two, We are out of that loan, but we need to find that lease. Life Science is having a difficult run, as you said, because of supply. Always joked that we don't need three times as men as much lab space if we're not graduating three times a scientist. Going forward, I think it's more difficult than that. I think AI, if you look at a certain gene or something that you wanna take on, in the life sciences world, AI is going to take twenty possible conclusions and knock it down to two. Or some smaller number. And so I think the need for lab space is gonna continue to go down. Unfortunately, we probably have the least amount of life science exposure of of any of our peers. We did that one get through, but we've we've had a similar reaction to yours that the basis is high. It's difficult to convert back to office, and if you do, you're not going to return the equity and you may not return a loan balance. But these are these these are difficult problems, and and, I think the market's going to become more aware that that it's a more difficult sector than everybody thought it was a handful of years ago when we converted anything that didn't work as office hoping to get higher rents. Sorry. I didn't mean to get Thanks, Jade.

Yes. And then on new initiatives, GSE Multifamily. I know it's business that you've been interested in. Historically, and maybe you're you know, uncertain about what the new administration does as to privatization and what the implications are there. Meantime, the existing assets generate really good servicing fees So is there potentially a move in that direction without making a huge bet sort of joint venture that you might be interested in.

Jade, you're you're a little distorted for us on the call. Did you say GSE MultiChoice? Multi. What are GSE Multifamily? Multifamily. It's just lenders. Oh, DUS lenders. Yeah. We'd love to get one. You know? You got one for us, Jane?

It's hard. There's there's there's certainly people that have reasons that they would wanna buy them brokers, etcetera. We've we've tried now three times buy one, did have to sort of buy into if the caps, hundred and forty billion caps today, Danny and Freddie. If we go through this privatization sort of what happens there, some people could argue would argue that although you're gonna pay about twelve or thirteen basis points more in a securitization for g fees, that you will actually see them able to increase volume because that hundred and forty billion has really been driven by mission low income housing type of or green housing. Type of mandate. So it would open it up for the GSE lenders if if we if we do that at a slightly higher cost, which is probably competitive with CMBS but not as much inside of CMBS as as it is today and certainly inside of where bridge lenders are. But, you know, as a bridge lender, we're doing transitional assets, and these are not transitional properties. These are properties with with high with high cash flows that they are assuming are near the top of cash flows, which is why they're locking in ten year debt. So we really like the business. Getting licenses has been is is difficult. Adding brokers who you have to pay multiyear guarantees to, you know, go to a golf club and and and schmooze, and and we we like being in the office sixty hours a week. It's it's hard to justify having you know, fifty people that you're gonna pay an awful lot of money for and not not know for sure where the market's going. It's a it's a bullish trade if rates go down for us if we started…

Our next question comes from Doug Harter with UBS. Please proceed with your question.

Thanks. You talked about, you know, expanding owned you know, owned getting back into buying properties. Do you think that would come with selling down some of the existing, or would that just be in in deploying some of the the excess liquidity that you have? Today?

He asked if we started buying properties, would we use our excess liquidity? Or would or would we look to sell down any of our existing properties? No. Well, first, Sorry. Mike was not. First, we we we use our excess liquidity. That's the most accretive way to to an an issue unsecured. To do so if if we didn't Obviously, we have a billion of cash and another availability, so it's not for the foreseeable future. But Yes. We we we would not need to sell anything to buy something, I don't think. We we do look at, as Jeff mentioned, that office building twelve twelve o one k. DC, I've toured it myself. I mean, it's a really good resi conversion. So And, you know, we've decided we wanna do it or have outside do it. We've we've made a lot of money in the REO business. Historically. So where we think the investment just sounds, you know, we've taken we've taken some serious hits on on an off building in Houston that didn't we got blocked by a tenant that wouldn't leave We had a pretty nifty deal, for access for that building, but the tenant wouldn't leave, and we had to sell it as an office building. That that's unfortunate. It's the user showed up, so it's pretty good. But it's not anywhere near the loan balance. But know, again, this this money went out, and you look at our balance sheet, this is where we stand today. So, you know, we have a liquidity I think we have an adequate CECL reserve And we have quite a large amount of capacity both liquid and and then levering. So we have billions of things we can do before we have to bother. Stuff. If if if…

Great. Thank you. Our next question comes from Donald Fandetti with Wells Fargo. Please

Hi. Can you talk about the Washington DC office and multifamily market? I mean, more people coming to work, but potentially fewer people And how are you thinking about that area?

Well, we have one building, I think, in Virginia. And two in DC. Which includes the twelve o one? That would have been three. Yeah. So It's not good. We don't know. Gonna happen there. I mean, even last night of this morning, I heard that they were firing sixty five percent of e t EPA, and they changed it to the lower expenses by sixty percent. Not necessarily fire that many people. You have two countervailing forces return to work which is really good. And, people will show up in DC. It'd be good for retail at great, the coffee shop The laundry mats and the tenants at the base of our buildings. We'll we'll have a field day. But we don't know yet, really, the outcome. It's not good for the DC off market. I don't know how you could say it would be. We do have some pretty good tenancy and and duration of tenants in our in our properties. So We're eighty four percent leased on our biggest loan in DC, and and our other loan in DC just just had another re up. So those two aren't terrible. Our our our Virginia asset, we signed two leases this quarter, but it's, I think it's only sixty four percent leased. So that that's probably more difficult, but it's a much smaller loan at a hundred and twenty million. But our our two larger DCs know, we we certainly are are hoping that the government isn't Completely shuttered for new leases because that that market is certainly very dependent on GSA leases. You just haven't seen them sign in the last four years. So we need to get back to work and it's great to see people coming back to work and being forced back to work…

Got it. Thanks.

We've reached the end of the question and answer session. I'd now like to turn the call back over to Barry Sternlicht for closing comments.

Thanks everyone for joining us today, and good luck in this Fascinating environment we're in, and we wish you well. And we'll see you next quarter.

Thanks.