Greetings and welcome to the Starwood Property Trust First Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Zach Tanenbaum, Director of Investor Relations. Thank you, sir. You may begin.

Thank you, operator. Good morning and welcome to Starwood Property Trust Earnings Call. This morning we filed our 10-Q and issued a press release for the 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-Q and press release for cautionary factors related to these statements. Additionally, certain non-GAAP financial measures will be discussed on this call. For 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, Jeff DiModica, the company's President, and Rina Paniry, the company's Chief Financial Officer. With that, I am 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 $156 million, or $0.45 per share. GAAP net income was $112 million, or $0.33 per share. Across businesses, we committed $2.3 billion towards new investments, our highest quarter in nearly three years, with infrastructure lending committing its highest level of capital in a single quarter since we acquired the business from GE in 2018. Our overall strong investing pace continued after quarter end, with $1.3 billion already closed. I will begin my segment discussion this morning with commercial and residential lending, which contributed DE of $179 million to the quarter, or $0.51 per share. In commercial lending, we grew our loan book by $859 million, which will help drive our long-term earnings potential. We originated $1.4 billion of loans, of which $886 million was funded, and funded another $250 million of preexisting loan commitments. Many of our originations were back-ended to the last half of the quarter, so the full earnings potential will not be realized until Q2. Repayments totaled $363 million, which is higher than we expected, leaving the book at $14.5 billion at quarter end. The growth in our portfolio also led to a slight decrease in our weighted average risk rating, from 3.0 last quarter to 2.9. We began executing on the resolution plan that we discussed on our last call and have resolved $230 million across three assets so far this year at pricing at or above our GAAP basis. The first is a $38 million nonaccrual loan secured by a hospitality asset in California. During the quarter, we received $39 million in full repayment of the loan, resulting in a $1 million GAAP and DE gain. The second is a $55 million apartment building in Texas that we foreclosed…

Thanks, Rina. We informed you last quarter that we intended to raise incremental capital to increase our lending pace in what is one of the best origination environments we've seen in some time. As Rina said, we originated $2.3 billion in new investments in the first quarter and are on pace for a strong second quarter with more than $1 billion already closed in the first month. The opportunity set should be large. In CRE, record origination volume from 2021 and 2022 needs to be refinanced in the coming quarters. Real estate transaction volumes have picked up. The CMBS single asset single borrower market has pulled back given the steepening of the credit curve. Many lenders are capital constrained and banks earn higher ROEs lending to us than competing with us on their loan origination. The year started strong and that strength continues today. I just got off a call with the co-head of U.S. debt for a major brokerage who told me they have 50% more debt and equity deals in the market today than the same period last year. These factors create an opportunity for well-capitalized lenders with consistent access to capital markets to prosper. As we have in the past, we have again proven our unique ability to raise both debt and equity capital accretively in this cycle. In March, we were 4.5x oversubscribed on the issuance of $500 million in sustainability bonds that Rina mentioned, which we swapped to SOFR plus 261, our six basis points off the record tight spread that we achieved just four months earlier in December 2024. In the last year, we issued a repriced $4 billion in debt and equity instrument. $2.6 billion of that was completed in just the three months from December to March, where there was very little…

Good morning, everyone. Thanks, Zach, Rina, and Jeff. I guess for us, let's just start with the economy. The economy is going to weaken. I just was talking to CEOs of a portion of 100 companies the past few days returning from the West Coast, and there will be issues on shelves, and there will be prices for consumers to absorb, and you kind of already were in a recession. You kind of saw it at the lower half of the country, and the top 10%, 15% of the country was carrying spending and consumption, and now we'll see how the wealth effect actually plays through them. Actually the markets have recovered [indiscernible] pre-Liberation Day highs, but that doesn't really feel right, and things like travel are clearly off. I guess it was Expedia that reported, and then Airbnb, and we've seen the travel numbers. The airlines have talked about their stress as international travel in the United States dissipates, but it will go somewhere, so Canadians will go to Europe or they'll go to the Caribbean. They may not come here, but they're the number one tourist in the United States, and the Europeans will probably stay in Europe and frequent Greece and other locations rather than come to visit us. So, the economy will weaken, and that means [indiscernible] sooner or later will lower rates, and for sure when he's out in May of 26, there's no chance rates will be higher, because the selection will depend on somebody who accommodates a lower rate environment. That is all good for the property segment. And so I feel like we're through the worst of it, and it's going to get better from here, and transaction volumes, which kind of have slowed again given the blowout of spreads and uncertainty…

[Operator Instructions]. Our first question comes from the line of Doug Harter with UBS.

So, it sounds like you've started to make some progress on resolving your non-performing loans. As you look at the remaining assets there, how should we think about the pace of resolution and whether you can be kind of as successful at exiting those with minimal losses?

Yes. Hey, Doug. Thanks for the question. There's a couple of apartment deals that we know we can likely sell at our basis, and we will do so this year. We have apartments at the Chatsworth building on the Upper West Side, and the scaffolding is coming down in May, and we expect to have significantly more progress there. We just sold the unit for $7.5 million this week in line with our underwriting, so that's good. We have an office building in Brooklyn that has just signed a second lease. It's now two-thirds full with long-term credit tenant leases. We have someone looking at the last third that could resolve easily this year. We have an asset in Dallas that is something that we have to work through. It's a combination of a mixed-use property with a hotel and multi-family. I think that's one we could likely work through this year. And we have a couple of downtown LA office buildings that could push into 26 or beyond, but that's generally the flavor. You know, multis, if we get to this forward SOFR in the low threes, 3.25, you pick a number, and you have a 5.5 or 6 debt yield, you have a high likelihood of getting out of par. Most of the stuff that we wrote loans on against 3.5 and 4 caps is the very lowest, the tightest part of the market in 2021. They're performing at that high 5 debt yield on the low end, and that high 5 debt yield gets out in a low-threes SOFR. In a low-fours SOFR, then we'll have to hold it for a little while longer. But where the forward curve is now, I expect things to sort of stop coming in and start picking up progress on the others. We have staying power in a lot of these loans. We have eight years of wealth on a lot of the office loans. Go ahead Barry.

I would just add that I want them all taken back, and they're not giving them back. I mean, they give them back because your attachment point is so good on replacement costs, and you would love to own them with the coming massive decrease in supply coming to the multi-market. So, rents will improve certainly next year, in the back half of next year, and into 2027. And one obvious impact of the administration's policies are people are very nervous about new starts, and nobody really knows what anything's going to cost. And it's not just materials, not just the steel. Those are the labor. Is it available? What will happen with the deportations of the immigrants and illegal immigrants? And then the third, what people don't talk about is the supply chain. You need to get every component to a building to finish it, not 80% or 90% or 95% of them. So, all people I know, and I just returned from industry conference where developers are talking about not starting projects and pushing them off, which bodes well for any existing asset and their performance. And the asset classes are performing now remarkably well. I mean, people look at -- we're not exactly the hottest kid today on the table, but the multi-markets are sitting at 95-ish, 94%, 95% occupancies with record supply. Usually in my youth, they might have fallen to the low 90s, high 80s. And for the most part, rents are flat-ish, slightly up, some few cities down, some cities up more than a few [indiscernible]. So, when there's new supply, they're weak, and when there's very little supply, they're relatively strong. We really needed a shallow recession, not a deep one that creates demand destruction. But even the office markets are shockingly buoyant if you have a good collateral. One thing I'd say on our book, I mean, one of the things, like, we have to consider, we have a building we took back in downtown CBD of Washington DC. It can be converted and is ready to be converted to residential. And I just suggest that we hold off the work right now to understand the situation in DC with the employment base.

But we're doing all the plumbing to be ready.

We're doing all the plumbing.

We're just not deciding one year forward whether we're putting the shovel in the ground on that date or not, but we'll be ready to go in a year.

No, we're going to be ready to go. We're just taking the moment we want to do that. So, it's relatively, we planned and designed the entire conversion. It's actually a very handsome property. It's just we want to make sure the rents are what we think they're going to be. So, with that and the next...

Yes. And part of that question, Doug, is the follow-up would probably be on the three large offices that are maturing this year. One is the Brooklyn office building where I told you we signed a second lease and got up to two-thirds lease. And we're talking now about a third credit tenant lease and that will work out. That's the March maturity. The June maturity is an asset in California that has a five debt yield. We have a basis in the low 200s of foot, we sold 15% of that complex by selling one building at $280 a foot, $66 above our basis. So, we feel okay. And we think there's good leasing prospects. We're working on updating the lobbies and doing some work there. So, we actually felt pretty good about that. And then the October maturity this year is our large loan in downtown DC, really trophy, a terrific building. It's 84% lease. It has eight years of waltz and it'll have a six-ish debt yield and likelihood to be able to go up from there. But our capital, given we have such liquidity and access to capital, we have the ability to ride these out and wait for the optimal time. And we will move on at the optimal time. So, when we have waltz, we have cash flow, it doesn't necessarily make sense to go today. We're going to wait, see what the market gives us. And we sort of know where our downside is, but we think we have upside on these two. And that's part of being $110 billion CRE manager. Hopefully, like we have in the past, where I think we had going into this cycle, $100 plus million of gains on our REO. We like to work on assets and Barry likes to be involved. And that's why he knows all the details of a rental in DC and what we're going to do. And so, we're very involved and we'll work it out as best we can.

Our next question comes from Don Fandetti with Wells Fargo.

Can you talk a bit more about the opportunity you're seeing with residential credit? Clearly, you have a lot of capital, banks are selling. And I think you said you've been on a portfolio. Are you constrained in terms of not wanting to put on a lot of leverage there or is this a significant opportunity for growth?

Yes. The portfolio that we looked at was a $2 billion portfolio of commercial that was coming out of a middle market bank, $10 million or so loans, the kind of thing that's perfect for us. With LNR as our servicer, we just have so much information. We can rip through a massive portfolio like that very quickly and come up with a value that's accretive to us. A couple of people, I think, thought it was worth a little bit more, but we went a few rounds on that. In resi credit, you've noticed we haven't restarted the resi machine. We took a write down of $230 million or $240 million in 2020 or so on our resi book. We owned lower coupons than market as the rate went up. And we've been a little bit reticent to go again, but our resi team has been looking at just about every opportunity, every platform. I could definitely see us buying an originator, building an origination business, around non-QM, which we've done in the past, and some agency and maybe some investor loan things like some of our peers do. I do think that there is tremendous liquidity available to us from a financing play on that. I think leveraged yields are attractive. There are decent opportunities also in secondaries there, but we are going to reemerge in resi. It's just a matter of when, and we are looking at every opportunity to figure out how we do that. To buy a resi originator with licenses that does $2 billion or $3 billion a year, you might pay $125 million to $150 million of premium. We're trying to decide if that's something we can build and create $125 million to $150 million of shareholder value by building it ourselves rather than going outside. But you will see us in the next year reemerge and start putting some credit trades on in resi. We do think there's a long-term opportunity and it's something that fits us really well. I'd love to see our dividend yields come down from 10% where I don't really understand it there. But if it did come down and our cost of capital changed, then that business becomes a lot more attractive. But where our dividend yield is today, our CRE lending and our energy infrastructure businesses feel like the best home for capital.

Got it. And then on corporate M&A, are you still thinking that sellers are reluctant, especially if we're looking at Fed cuts, or do you feel like you're starting to feel more optimistic that there could be a seller and some consolidation opportunities for you?

Given REITs are very hard to buy, you can't buy more than 9.9%. There's a lot of rules that they have to want to be bought. And corporate M&A in the REIT world is very difficult unless a seller wants to be a seller.

Yes, I mean, it's not where they're trading, it's what the board will do a deal at. And I think you'll see some action in the sector because they're sort of dead men walking. But it really depends on the board and the management team's cooperation. You need to get in there on some of these books. You can't do it easily from the outside. You need to get inside and really understand the complexity of the asset base. So, you can guess, but guessing in this business. And obviously, a lot of these smaller entities don't have our corporate debt. They have repo debt or they have other, you have to really understand the terms and conditions of that stuff. So, it's a little bit complicated from the outside looking in. Especially when they want prices that on the surface aren't really achievable. And obviously, we'd like these investments to be accretive to our shareholders. But I think, I'm optimistic that as we come out of this, it'll become more painful for some managements to basically do almost nothing. They can't do anything. They don't have a balance sheet. They can't raise capital accretively. And in some cases, the manager fees will overwhelm their ability to pay it. So, inevitably, there'll be stuff to do.

And we're a huge part of the REIT index, given we're more than twice as big as the next biggest competitor and almost as big as the rest of the universe. So, if we could reduce G&A and consolidate the entire business, we would certainly love to do that at the right prices. The hardest time to do M&A is when someone's trading at 20% or 30% a book. If you're going to pay them some significant discounts a book that might feel untenable to their board or their shareholders, the easiest M&A is probably at 70% or 80% a book, where you can pay somebody 90% to 100% a book, cut out G&A, make it make sense for both. So, it'll be difficult. Somebody's going to have to want to be consolidated.

Our next question comes from a line of Jade Rahmani with KBW.

I think earlier, Rina mentioned that the timing of loan closings weighed on interest income in the theory of spending business in the quarter. Are you expecting an increase in 2Q and going forward?

Yes, this is something that I'm always reticent to talk about, Jade, because it feels like it's been in every peers transcript for the last five years. But we did close a tremendous amount right on March 31st, so you didn't see any interest income. So, I think it's the first time we've used that arrow in our quiver, but it was very true this quarter where we had a lot of closing plates. Our pipeline is really good. Rina always gets mad at me if I want to say what we're going to end up at, but I expect this run rate to be a run rate for a little bit. It's difficult out there. We've lost a number of deals in the last week or two that we hope to get, but we have as long of a pipeline as I've seen, both in Europe and in the US, and there's a lot of really interesting opportunities. So, hoping that we can maintain that and maintain the success in our energy infrastructure book as well. We want to grow. Growing is the way to ensure that getting this portfolio back up above our previous high, which I think we will do this year, is the best way to offset the drag of the non-accruals, as Barry said, until we can work out of them. So, we are in a growth mode, but it's not growth at any cost. We're reticent on the last five basis points on every deal, and we're trying to not chase anything to do it. So, grow smartly is the mantra.

You mentioned something interesting on subordinate debt. I was wondering if you plan to execute on that opportunity by originating whole loans and bifurcating them, doing more syndication, or will you just be looking to originate mass loans? How do you see executing on that?

It runs the gamut. Adam Bellman's in the room. He runs our LNR business and our CMBS business. I think there are opportunities in B pieces. We're going to do a few this year. When I said subordinate debt, I'm basically saying that what we create when we write a 65 or 70 LTV loan and we finance 45% or 50% of it is effectively equivalent to a BBB or a BB asset. And that's $100 billion of money that we've put out over the last 16 years. And with the credit curve insecurity deepening, we think we should be able to earn a little bit more on our loan book that mirrors the look through rating to those. We can also obviously play in subordinate securities as well. And that's something that the team has been looking at. They've got cheap, but not super cheap. We don't like putting leverage on leverage. We haven't done that here in a long time. If they're unlevered yields on BB's are 10% or so, it doesn't quite hit the hurdle that we're hoping for and we're reticent to leverage. But on the right securities where we have the ability to underwrite every loan in every CMBS deal and have a real strong opinion, that book, Adam has probably returned over 20% for us in the 16 years that we've owned it. If that becomes an 11 or a 12, we will be a large buyer of secondary bond with our liquidity.

That's unfortunate when it gets up to those levels, you start losing interest on the sellers. We haven't reached the sweet point of that.

Yes. Thanks, Jade.

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

Barry, when I parse through your comments, what I hear are a lot of cross currents that you're confronting. The consumer is slowing down, but you see rates going lower as a result. It's an attractive financing market. There is capital available in the market, but your competitors, many of them are on their heels. Really two questions here. One, does that put you guys on the front foot now in terms of being aggressive to pulling capital? Do you want to be a little bit more conservative? Also, as you described them, the dead men walking for many of your competitors, but the availability of capital in the markets, is it creating new competitors or new types of competition for you guys?

It's your competitors, as you point out, are shifting. I think we see the private credit guys much more. But I think we still have an advantage in our scale. We wrote a $500 million junior position. Not many people get that phone call. Because we know the property classes and we're active, people know we're going to perform. They know that it won't take us seven years. We can do it expeditiously. I think the amount of capital needed in the data center space is staggering. The credits are great and the debt yields to our positions are phenomenal. Spreads have come in, but if we can pick up the juniors in those positions, we actually probably don't know it, we're very active on the equity side of data centers. We've probably committed over $10 billion to the space and have 1.5 gigawatts of power under our control. We're among the top 10 largest players in the states and number one in Ireland. And we have about 160 people working in the data center space. So, we can underwrite this stuff quickly. We know the credits, we know the tenants, we know the issues and leases. We've written them all to Amazon, Oracle, Light Dance, et cetera. I think that's a space area we could add infinite capital to if we had it. And we do like the positions there. So, that's a big new giant to take the scale of the commitments from the majors. It's something like 250 billion to 300 billion leveraged. It's 900 billion, that's almost as big as the infrastructure bill. And that's this year. So, maybe 25% of it's offshore. There's a lot of capital that needs to go into the space. So, we've done some, we'd like to do a lot more.…

I'd encapsulate that by saying, as the REITs and the banks have written less loans since COVID, you've certainly seen insurance, debt funds, and CMBS pick up the slack. As you look at the forward SOFR curve and expectations of forward rates, if rates do go down, you're going to have less annuity sales. Insurance is very yield-driven, and they will pull back. So, in that environment where we move to the forward curve and rates go lower, we expect that our position in the market will only improve versus insurance and debt funds and CMBS. And then the last thing I would say is Barry talked about data centers. The only thing that he didn't mention is that all of our loans have been made on sort of 15 or longer-year leases to sort of MAG-7 credit tenants on the other side. So, not a lot of speculation there other than getting the construction project finished, which we have significant time to do, and this core and shell is not that hard to figure out. So, we really like that space.

Got it. As always, a very interesting answer. I really appreciate it, guys. Thank you.

Thanks, Rick. Thank you, Operator.

Thank you. We have reached the end of the question-and-answer session. Mr. Sternlicht, look, I'd like to turn the floor back over to you for closing comments.

Thanks for joining us, everyone, and we look forward to talking to you next quarter. Have a great Memorial Day, I guess, as we enter the summer season. Stay well. And a public shout-out to Mark Cagley, who retired from the firm last month, and this is the first call in 10 years without him. Hope you're enjoying your retirement and listening in. And your handicap is dropping. Take care. Thanks, everyone. Bye.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.