STARWOOD PROPERTY TRUST, INC. Q1 FY2025 earnings call

• Rina mentioned $2.3 billion committed to new investments in the quarter, highest in nearly three years; commercial lending loan book growth, origination and repayment details, asset resolution; residential lending portfolio and RMBS details; property segment rent impact; investing and servicing securitization; infrastructure lending investment and CLO. Liquidity and capitalization: $500 million sustainability notes issuance, repayment of high yield notes, weighted average corporate debt maturity extended, liquidity at $1.5 billion, $9.5 billion credit capacity, adjusted debt to undepreciated equity ratio 2.25x.
• Jeff said originated $2.3 billion new investments in Q1, on pace for strong Q2; CRE has refinancing opportunities, banks' ROE higher lending to company; March sustainability bonds oversubscribed 4.5x; issued $4 billion debt and equity instruments in last year; $1.5 billion capital to invest; low leverage, large unencumbered assets; balance sheet to grow materially, maintain dividend; CRE loan portfolio up $859 million to $14.5 billion, expected to reach record high by year end; legacy credit reserves; US office exposure at 9%; CECL reserve first decrease in four years; energy infrastructure lending portfolio; property segment rent growth and value.
• Barry noted economy will weaken, rates will lower; company has best balance sheet and team; looking for investment opportunities; is only 2.0 mortgage rate trading above IPO price and never cut dividend; property segment high rent growth; ability to reinvest in bad assets; team executing well; AI project in progress.

Commercial and Residential Lending

• Commercial lending: Grew loan book by $859 million. Originated $1.4 billion of loans, with $886 million funded and $250 million of preexisting loan commitments funded. Repayments totaled $363 million, leaving the book at $14.5 billion at quarter end. Weighted average risk rating decreased from 3.0 to 2.9. Resolved $230 million across three assets so far this year. CECL reserve decreased by $26 million to $456 million.
• Residential lending: On-balance sheet loan portfolio ended the quarter at $2.4 billion, with $55 million of repayments. Retained RMBS portfolio ended the quarter relatively flat at $422 million, with an $8 million positive mark-to-market offset by repayments.

Property Segment

• Recognized $16 million of DE or $0.05 per share in the quarter, driven by Florida affordable multi-family portfolio. HUD released new maximum rent levels, with 6.7% of incremental rent growth deferred to next year.

Investing and Servicing

• Contributed DE of $50 million or $0.14 per share. Starwood Mortgage Capital completed four securitizations totaling $268 million at profit margins at or above historic levels. Active servicing portfolio ended the quarter at $9.6 billion, with $800 million of new transfers.

Infrastructure Lending

• Contributed DE of $20 million or $0.06 per share. Committed $2.3 billion towards new investments, highest quarter in nearly three years. Infrastructure lending committed highest level of capital since 2018 acquisition from GE. Portfolio at quarter end was $2.8 billion. Completed fifth infrastructure CLO with record low cost of funds. Non-mark-to-market CLO financing for infrastructure debt at 58%, and for the entire company at 84%.

• Originated $2.3 billion new investments in Q1, on pace for strong Q2 with over $1 billion closed in first month of Q2. Expected balance sheet to grow materially this year. Will maintain dividend. CRE loan portfolio expected to reach record high by year end. Energy infrastructure lending to continue growing. Property segment's rent growth to add value.

• Economic weakening may lead to uncertainty. Interest rate fluctuations. Uncertainty in asset resolution progress may result in losses. Turmoil in CMBS market may affect investment.

Q: How should we think about the pace of resolving non-performing loans and exiting those with minimal losses?

A: Jeff DiModica mentioned there are apartment deals likely to sell at basis, like Chatsworth building and Brooklyn office building; Dallas mixed-use property and downtown LA office buildings may be worked through; with forward SOFR in low threes, most stuff has high likelihood of getting out at par. Barry Sternlicht added on office building conversion in DC and rent growth impact.

Q: Can you talk a bit more about the opportunity in residential credit?

A: Jeff DiModica said looked at a $2 billion regional bank portfolio but it priced inside hurdles; resi team looking at opportunities, could buy originator, build origination business in non-QM, agency, etc.; will reemerge in resi, see long-term opportunity.

Q: Are you still thinking that sellers are reluctant in corporate M&A?

A: Jeff DiModica said REITs hard to buy, corporate M&A in REIT world difficult unless seller wants to; Barry Sternlicht added it depends on board and management cooperation, some action in sector as some are dead men walking.

Q: Are you expecting an increase in interest income in 2Q and going forward?

A: Jeff DiModica said closed a lot on March 31st, pipeline good, hope to maintain run rate, growing smartly.

Q: How do you plan to execute on subordinate debt opportunity?

A: Jeff DiModica said runs the gamut, opportunities in B pieces, team looking at it, will do a few this year, like BB assets, and can play in subordinate securities.

Q: Does that put you guys on the front foot in terms of pulling capital or being conservative? Also, is there new competition?

A: Barry Sternlicht said has advantage in scale, active in data centers, done over $10 billion in data center space, private credit guys more, but scale is advantage; Jeff DiModica added as REITs and banks write less loans, insurance, debt funds, CMBS pick up slack, if rates go down, position will improve vs others; Barry mentioned data centers have great credits and debt yields, loans have long-term leases to MAG-7 credit tenants.