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Greetings, and welcome to the Starwood Property Trust Second Quarter 2025 Earnings Call. [Operator Instructions] A question-and- answer session will follow the formal presentation. [Operator Instructions]As a reminder, this conference is being recorded. It is now my pleasure to introduce

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 with the presentation of our results, which are both available on our website and have been filed with the SEC[Audio Gap] 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 perform 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 and 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,

Thanks, Rina. Before I begin, Barry, the entire Starwood team and I would like to send our heartfelt condolences to the friends, families and loved ones of the real estate professionals and first responders who are senselessly taken too soon in last week's 345 Park Ave tragedy. Both real estate professionals were very well known and respected at Starwood. As you know, we pre-released earnings on July 16 and raised $500 million of equity to help finance our purchase of fundamental income. . This will be our ninth business and gives us a portfolio of 467 owned properties and 12 million square feet that is 100% occupied by 92 tenants at an average WALT of 17 years, with 2.2% average annual rent escalations. The assets are split fairly evenly between service and industrial with a small component of retail assets. As Rina said, we used $1.3 billion of in-place debt $879 million of which is in ABS Master Trust, and we used approximately $400 million of cash to round out the transaction capital stack and expect to earn increasingly higher ROEs as we leverage the overhead in place. Most importantly, this business sits at the intersection of the cornerstones of our and our managers' expertise, real estate and credit, making it an obvious place for us to invest. We thought about incubating this business ourselves, but ultimately thought having an established team and scaling quickly made more sense. The team consists of 28 experienced professionals who have spent their careers at large net lease businesses. They have deep expertise in origination, underwriting, portfolio management and capital markets. There are strong relationships with middle-market companies and private equity sponsors will significantly enhance our capabilities and market reach. This team is scaled to grow. This is not our first foray into the net lease space. Our successful investment in the Bass Pro, Cabela's transaction demonstrate the attractive risk-adjusted returns and long-term value that can be achieved in this sector. The acquisition of Fundamental builds on that success and reflects our confidence in the continued opportunity within Net Lease while opening the door to new growth opportunities in the sector, both domestically and internationally. Fundamental maintains an ABF Master Trust, which to date has issued 3 securitizations, which sequentially priced tighter as the trust grew in size. We expect to continue to grow the ABS Master Trust, where we can borrow for up to 10 years on a fixed rate basis. Executing this strategy will leave us with a portfolio that would look a lot like public peers who traded a significant premium to GAV with a conservative FCCR of 6.4x on the in-place portfolio we are buying. We expect this business to be accretive to earnings next year and more meaningfully beyond that, should we achieve our business plan. When we bought our Energy Infrastructure business in 2018, we paid a similar gross amount for assets that yielded much less. We likewise added an experienced team and trusted that the synergies with our platform would yield incremental return. We have turned that business into a compelling investing platform over the last 7 years. We look at fundamental the same way and believe with a lower cost of capital than their previous owner that we will be able to grow this business accretively. The team is up and running in building a pipeline and having seen strong deal flow in the days since our purchase. Given the growth in our property infrastructure, CMBS and now net lease businesses, our CRE loan portfolio is today just 52% of the assets on our balance sheet versus 65% in 2022. Our diversification has created compelling consistency and has left us as the only mortgage REIT to never cut its dividend. We announced our Board authorized our Q3 dividend of $0.48 for the 47th straight quarter. In Capital Markets, we recently repriced both our term loans due in 2030 and 2027 and totaling $1.6 billion at record low spreads for our sector, SOFR plus 200 and SOFR plus 175 and both at par. Optimizing the right side of our balance sheet has always been as important to us as the investments we make. And we have been very busy repricing our liabilities at the tightest spreads in our 16-year existence. Over the last 18 months, between the issuance of equity, senior secured notes and term loans, we have completed over $6 billion of capital markets transactions. Of our $5 billion in corporate debt today, only $400 million of it matures prior to 2027, and we have unencumbered assets in Term Loan B collateral today to issue $2 billion of incremental corporate debt. As we told you last quarter, our Board approved business plan is to continue to grow the scale of our business to offset the drag created by previous cycle nonaccrual assets that we have largely held on to create the best total return outcome for our shareholders. To that end, we've originated $5.5 billion in the first half of 2025 more than all of 2024, led by our 2 largest lending businesses, commercial and infrastructure lending, with the benefits to be seen in 2026 and beyond. In CRE lending, we closed $1.9 billion in loans in the quarter and $4.1 billion in loans through June 30, with over 70% of the quarter being industrial and multifamily assets with an on-trend weighted average IRR and LTV. Of that, all loans were new to Starwood Property Trust 16% were international and 74% were to repeat customers, proving the strength of the relationships in our 16-year-old firm that has lent to over $100 billion since inception. We expect this elevated investment pace to continue in the second half of 2025, leaving us with the largest CRE loan portfolio in our history by year-end after a 20% decline in 2023 and 2024. Our risk ratings and reserves held steady in the quarter, and as we expected, CRE markets are stable with forward rate expectations continuing to move lower in all credit markets trading at very tight spreads, which has catalyzed activity in the CMBS [SASB]lending and real estate equity markets. Rina told you our 5 risk-rated bucket was reduced in the quarter [Audio Gap] creating lower LTVs. As Rina said, we committed $700 million of new capital in the quarter at mid-teens returns. This portfolio now stands at a record $3.1 billion, and we expect to continue to grow this portfolio. We completed our fifth CLO in the quarter, and I will add that it was at the lowest coupon SOFR plus 173 and cost of funds in our history. We expect to issue 1 to 2 more CLOs this year, which will increase our term nonmark-to-market debt even further. In REIS, I will note that our active servicing portfolio is over $10 billion today, the highest in this cycle and likely had it higher, which will produce significant incremental revenue as these loans resolve. As a reminder, our servicer is a positive carry credit hedge that earns more money in times of real estate distress. In closing, we are very excited to have added our new business line. We are excited about the return of liquidity and opportunities in our core businesses and that CRE finance markets continue to repair with better performance and lower expected forward rates. The forward market had SOFR declining to 3% in the first quarter of 2027, which is 50 basis points below the expectations just 10 weeks ago, which should have a material positive effect on our legacy credits. With that, I will turn the call to Barry.

Thank you,

[Operator Instructions] And our first question comes from the line of Dan -- Don Fandetti with Wells Fargo.

Can you talk a little bit about your expectations for CRE loan growth, I think your portfolio was up 6% quarter-over-quarter. And I guess [Audio Gap] got loan growth to accelerate.

Thanks, Don. I'll take it first and can hand to Barry after we've done $4.2 billion, I think, through 2 quarters. We have obviously closed more since the end of June that will put us on a mid-$8 billion pace. The record we ever did was $10 billion of transitional floating obviously, that's taking away the other cylinders CMBS and Infra and all the other things that we do lend on. I think that we will end this year very close to that $10 billion number that we did in 2021. In 2021, you had $670 billion of transaction volume. I think you're probably closer to [$400 billion] this year. So transaction volume hasn't picked up. It will pick up in your scenario. Lower rates will help that. Lower rates will also help refis. You have some assets that have not yet refi from pre rate rises, the 2020, '21 and early '22 vintages that were very large. Some of them have not yet moved, so those will move forward. Creating more opportunities. And obviously, business plans that have played out on the 2022, '23 and '24 loans. We'll be more likely to refi as we see spreads come in. So we're on pace even without that great environment to have close to a record year. We are very much on offense. I think there are a number of people who have not been able to be on offense. We've invested in every quarter since our inception. We've been investing aggressively for the last few years. As I said, our goal is to continue to grow the balance sheet to offset nonaccruals so we can sit on assets and work them out to the benefit of shareholders rather than selling it at a more distressed level. And this will also help that lower rate environment will also help that nonaccrual book. And many of them have debt yields that are just below where they might be able to refinance today, and they'll be able to refinance in your outlook. So we hope that's right, but we have built the business to be okay in either direction. We'll be fine in a higher rate environment, as we're showing you in the first half of the year. And we're prepared for that. But certainly, we'd all like to see that low rate environment that Barry pointed out is likely, that I pointed out the forward curve is saying will happen in that you're supposing, but feels like we have upside from here, not downside as rates potentially go lower and we move further away from the beginning of that '22 rate hike cycle.

Got it. And can you talk a little bit about the ramp-up of .

Yes, -- can you hear me, Jeff?

Perfectly, Barry.

It's Barry. Can you Yes. I'd say I mean we have a lot of business lines now. So we're really agnostic of where we've put capital. And we also know capital doesn't grow on trees. So we're going to be even more focused on not just dollar originations, but the returns and the full dollar profits the likelihood that money stays out longer than we've probably been in the past. And lean into good credit. Now we'll do it with fundamental as we've done with SIF, we'd like to continue to grow our infrastructure lending business, and we're continuing to look at other businesses. So we don't have infinite access to capital and not at these dividend yields. So we have to be careful and judicious to...

Barry, you cut at the end. Barry, you cut out at the last 20 seconds, so I'm going to hand it to Don. Well, maybe you get a better connection.

In terms of my follow-up, Jeff, if you could talk a little bit about the ramp-up of the net lease portfolio business. It sounds like there's going to be some domestic and international opportunities. Are there portfolios? Or would this just be sort of a kind of smaller acquisitions over time type strategy? .

Yes. Listen, we laid out for you the portfolio that we have and that portfolio was sort of $20 million to $30 million assets. That's the sweet spot for this company. That's often the sweet spot for this segment. I will say, in the first week that we own the business, we saw a $160 million trade that revolves around some school buildings. We saw a $400 million and $600 million potential opportunity, 2 different ones there for a total of $1.16 billion in 3 potential opportunities. The last 2 were industrial assets, well located that we've looked at. I'm not sure that we're ready to jump in at that scale today, but the team is rebuilding a pipeline. They had sort of closed their pipeline a bit over the last couple of months, but their pipeline is growing again today. And I would expect that -- I mentioned we underwrote $400 million to $500 million a year for the first 3 or 4 years just to get to our accretion dilution number. My guess is we can do double that, the team is really strong as the pipeline builds, we have great confidence that they're going to do significantly more. And as Barry said, doubling the size of this business will make it look a lot more like some of the public comps that trade at 1.4x GAV. And with our FCCR of 6.4x and I think the industry closer to 3. We have really good credits in the book. We're very happy with -- we spent a tremendous amount of time to start Capital Group and our team there [indiscernible] and Peter Reid and our team did a tremendous job underwriting together with our team, the credit. So we feel really good about what's on the book, but I think we will be looking to grow in the $20 million to $30 million space that they've historically done, but we will look at these bigger trades. If we found the credit that we like, I think we could certainly supercharge that growth. But the modeled number is not our expectation from management. We think we can grow faster, but it's going to take them a couple of quarters to rebuild the pipeline. And for the world to really realize that Starwood is very behind this business. We have a lower cost of capital than their previous owner had, and we're super excited to be able to go into cap rates that are a little bit lower than what they've been able to buy previously, which will give us better credits and with our financing and getting better financing than what they had historically, we think that, that will create even higher returns. So super excited about where this is going to go.

And our next question comes from Rick Shane with JPMorgan.

Look, the organic growth in the infrastructure business has accelerated nicely. Curious about really 3 things here. One, it looks like the spreads on this business are a little bit wider. Curious if you see that as sustainable or converging given the competition in that space. Two, it also looks -- and Jeff, you alluded to the fact or not alluded to, actually stated you're focused on the right side of your balance sheet is on the left side. It looks like the funding spreads in that business are also wider. Is there an opportunity for additional efficiency there -- and then finally, can you help us understand the duration of those assets in the context of the core balance sheet?

Sure. I think Sean Murdock is probably on here. So I may -- he doesn't speak very often. He runs that business tremendously well for us. But I'm going to start with a couple of the other questions. The right side as far as the funding goes, it's really interesting what happened here. The banks who lend here tend to be more corporate credit lending banks than they are real estate lending banks. So in early '22 when rates went higher, we went from borrowing on cash flowing multifamily at $125 to $150 over, so for up to $250 to $300 over so for the same assets. Spreads widened on everything on office, they went 3x that on hotels that went significantly higher and we saw a pretty steep move wider and that has now come back. We're getting close on commercial real estate to back to where we were, but we got whipsaw of it. At the same time, we got much higher coupons for making a loan on a commercial real estate assets. So our returns ended up about the same over that period. The infrastructure business was very different. The right side, the funding spreads that you said are a little bit wider stayed about the same. Our lines are between sort of 175 and 200 over before we go to a CLO, and that never really moves wider. So asset spreads did move wider for a few years, and it allowed us to go from earning low mid-teens to earning mid-high teens for a couple of years. We're back in the mid-teens today, as the asset spreads have come in a bit, you've seen that in the term loan B market with a number of repricings and a portion of our book is term loans. But the CLO market, and we just priced our fifth with $173 over cost of funds that is tight or tighter than we're going to do anything in the commercial real estate side. When we did our first 3 CLOs in CRE, I think the bond spreads were $195 over then down to $180 over maybe 1 got to $165 remembering back 4 years ago. But you're in line with where the CRE CLO spreads are. And we are likely to do a couple of more this year. So I think with repo lines that we'll probably all be moving towards $175 for that business. And with the CLO market that on the last 1 was $173, and I think will be tighter today. It funds itself really well given we are still getting a higher coupon today than what we were getting pre-2022. So feel really good about that. I mean, by the time we do another 1 or 2 CLOs, we'll have most of 2/3 of our assets funded in nonrecourse, non-mark-to-market CLO debt there. That's an incredible statistic versus where we are and where the industry is in commercial real estate. So we're sort of super happy there to not have any potential margin calls. The LTVs on that book have moved down from mid-60s, low 60s when we might have written them. I think our blended LTV is about 46% or 47% for that book as the power needs have increased in the United States, it's really helped our energy-producing assets. And then you asked about organic -- about growth in there. And Sean, are you on maybe talk a little bit about the fact that we've done a couple of our own deals, and we're not as reliant on syndicated deals?

Yes. I think the way we've tried to sort of maintain interest margin is exactly what Jeff mentioned, we're doing more deals ourselves. There may be a little bit smaller infrastructure assets, but where we can sell underwrite and so execute that tends to [Audio Gap] come in tension between the syndicated or club loans and individually in single lender assets. Great, [Audio Gap] thank you so much.

These are $1 billion power plants. Construction costs have gone from what, Sean under $1,000 to probably closer to $2,000 a megawatt now. So they're very expensive. They're very large. Rick, 1 of the questions I didn't answer was duration. Sean's loan, the energy infrastructure businesses loans tend to be 5- to 7-year loans, where the commercial real estate loans tend to be 3- to 5-year loans. Obviously, if things work out, things can pay off a little bit earlier than that, but I expect a little bit more duration on our energy book than I do on our commercial book.

Got it. Okay. Very helpful. And thank for having time on this one.

Thanks Rick.

And our next question comes from the line of Jade Rahmani with KBW.

Thank you very much. We don't often get credit for mistakes we avoid, and I have to take my hat off to you for only doing 1 life science deal in a super competitive market in the last cycle. The $17 million loss doesn't seem all that bad in a broader context. So I applaud you for taking action on that and the $51 million equity kicker gain also a nice surprise. So the question is on credit. Do you believe credit in the portfolio stabilized based on what we know now. Do you expect the gradual improvement on resolution plans you have in place? And also if you could comment on the hotel exposure in the loan portfolio.

Absolutely. Thanks, Jade. I appreciate the nice words. The life science market we looked at -- you had a lot of office that was getting converted to life science back in the days when everybody was taking more coming out of Covid. Obviously, there was a great need in COVID. But we didn't feel like we needed a multiple more of life science space. You just didn't graduate enough scientists to create a significant of a demand. And we knew AI was coming in that would reduce the number of trials that somebody might make it going after a gene or whatever it is from -- you might have gone after it 10 different ways well with AI, you might only go after it a couple of different ways. So I think we've had a relatively bear [Audio Gap] view on that for a while. Unfortunately, we did that 1 through. We thought it would be a good $17 million write-down on that, and hopefully, we can work out a bit. The kicker gain was nice as well. So thank you for bringing that up. The hotel exposure, I'm getting my percentage is right now, I think it's 6% of our overall [Audio Gap] there, we've not lost any money on hotels. We kept went into the COVID side, but we actually said something in 2020, and I'm going to turn it to Barry if he's here because he is the greatest hotel expert I've ever met. But in 2020, we said we didn't expect to lose any money on our hotel portfolio, and that was when they were all shut. So right now, we feel really good about the exposures that we've taken. It's a broad mix of some destination, some roadside and drive to and some in more major cities. But the hotel book continues to hold up very well. Hotels can miss on their cash flow by a little bit, but when you're lending at 65% or 70% we have a lot more cushion there as income has gone up as you've seen anyone who's come into New York City in the last year has been where hotel rates are. Income has gone up, expenses have gone up also. So we're very careful on expenses. But to erode this 30% or 35% lending cushion that we have in hotels is a lot harder if things don't go bad and this higher rate environment has been met with higher income as well. So fortunately, there, we have that where you don't necessarily have that on office broadly. Barry, are you trying to jump in because -- is that you, Barry?

I could say it. Can you hear me?

Yes, I can.

Yes. Life Sciences secured the daylight side of us. it was sort of a conversion of office to life science was kind of like time share for a hotel that didn't work for a while, it was as good as it got. I think it's interesting you bring it up because I think data center space will be interesting spreads have contracted dramatically if a building is being leased or is fully leased, but some people are beginning to do or trying to expect data centers to get pretty widespread as you should in the spec data center, but it's something we're not choosing to do right now. So I think there are -- it's a similar thing. It's like you go back where you can go, so it's something that is obviously not spectrum we've got the best credits that are in the world. But the spreads there have dramatically contracted probably 200 basis points or 175 basis points from where they were when we started in the lending business in data centers. And we are a data center developer with $19 billion of pipeline ourselves. So we know the market from the equity side and the debt side, and we've seen what -- as we finance those buildings, and we've seen what's happened. The hotels, I mean, you have to be careful of the blue cities right now because the unions are really strong. New York City contracts coming up in May of next year, it's going to look something like what happened in L.A. So even though New York remains fairly strong, shockingly strong at the [rest of our line] given the depreciation of the dollar and its impact on foreign tourism. It is not Vegas is weak. There are markets that are weak, and we just cherry-pick opportunities. And I don't -- I think we are fine. We often lend and say, well we get the asset at the debt balance, we'd love to own it there [Audio Gap]. So I think that probably applies to almost all of our hotel loans.

On Atlantis, which was a large position. We're going to get paid off in the next quarter on a Hawaii asset. And obviously, hotels have a really high debt yield going in, and that high debt yield enables them to navigate the higher SOFR more easily. And Jade, you did ask 1 more thing on the credit cycle. I don't want to be too -- I don't want to skip over that. But if the forward curve is right and we head towards 3%. So for my gut is that the industry is likely overreserved. If you end up in the high 3s to 4%, the industry probably has reserved for that. And if forward curve ends up above 4%, there will be more problems. So today where we sit with the [forfeiture] of heading to 3% by the end of '26 early '27. I feel really good. But that forward curve has moved around by 100 basis points, 3x each direction over the last 1.5 years. So we'll continue to watch it, and we'll continue to try to work out of things that if the forward curve does stay above 4% that we have a path away from. But with the forward curve heading where it is today, I think everybody in our seats are feeling a little bit better.

And our next question comes from the line of Douglas Harter with UBS.

Hoping you could give us an update on kind of the time line for resolution on some of the problem assets or foreclosed assets. How we should think about kind of getting that capital back and kind of how much and just the magnitude of capital against those -- that's unproductive today?

Yes. I think it's about $1.7 billion or $1.8 billion today of nonaccrual assets, Doug. There's some where we have some control where we're making a choice today not to sell at today's level and that we think we have a better outcome by holding on. And so far, that's been working better than we might have thought. It would. I think we told you 2 quarters ago, that we had a plan that we would try to be half out of it by the end of '26 and then half again of that by the end of '27, which would be only 1/4 of that book. That's our patient forecast. Hopefully, we can do better. There are certainly some assets that we've spoken about here before that we can't do a lot on. There's a few that were syndicated on like a large retail asset, and then we're going to have to wait and work together with a group there that will take a while. There are a couple of things in Downtown L.A. and Downtown L.A. is just not moving forward as quickly as possible. So we're looking at other potential options on those. A few small apartments that make that up. You've seen us sell 2 or 3 of the apartments that we've taken back at our basis. My gut is we'll sell a couple more of those at our basis in the coming quarter or 2. So the REO book is mostly things that we think we have a handle on being able to move out in that time line. But as I said, there are a couple of other larger broadly syndicated things that might take a while. But that is built into what we produced to the Board for a 3-year plan, and we're sort of very comfortable with where that plan is and that, that will allow us to continue to earn this dividend over the next 3 years or so. So we're not going to rush rushing would cause you go from our 9.5% cost of capital, you sell something to an opportunistic fund and they have a 20% cost of capital, and then they bid it back for any downside that could happen, and that's not necessarily the best outcome hitting a bit today on an asset for our shareholders. We've seen some of our peers do that. But we have capital, we have access to capital, and we're going to act with our managers Starwood Capital Group has $110 billion of assets under management and look at each individual asset to try to go forward and make our best plan.

Great. I appreciate that, Jeff. And any update on the Washington residential conversion? Kind of what's the updated time line and thoughts of kind of getting that property underlying cash flow?

Yes. We -- I'll send you after we have some beautiful pictures of what that asset will ultimately look like. We're monitoring rents in that market. Rents have actually gone up on Class A multi-rentals. So we're starting to feel better and better, but we have not begun construction. We're in the permitting phase, and we have the final drawing. So I feel pretty good that it's going to be a tremendous product. It's in the right spot in D.C. that we hope to be able to give you a lot more information on over the next couple of years. It's a couple of year project. We've reserved money for that and we'll see. But we do have ourselves getting back our basis and more on that asset, as we've told you in the past, if -- once we're done with the conversion.

Thank you. And with that, this does conclude the question-and-answer session. I would like to turn the call back to Jeff DiModica for closing remarks.

Well, normal, I'll put it to Barry, but the connection isn't great today. I want to thank everybody for joining us and thanks to the team who did a lot of work to get a lot of things over the line in the last quarter. I appreciate everybody's time.