# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_STWD_2017/NYSE_STWD_2017.mmd` · pages 2-8_

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Dear Fellow Shareholders:

In the almost nine years since our inception, we are proud to have executed on what we have set out to do: build one of the premier global diversified real estate finance companies in the world. The only certainty in financial markets is that cycles will happen and opportunities will change. We have therefore created multiple business lines, or "investment cylinders," at Starwood Property Trust, Inc. (NYSE: STWD) to enable us to deploy capital in multiple ways to achieve our targeted investments returns at any time. If returns drop in one business line, we can strategically redeploy capital to our other business lines and avoid being forced into investments at the wrong time.

We believe we provide an attractive total return in an increasingly volatile world. Since over 90% of our loan book is floating-rate, we expect to outperform as interest rates rise. Our credit-first culture is represented in the low loan-to-value of our loan book, just 62.1% today. We have a diversified, best-in-class balance sheet, continue to increase the duration of our asset base and believe we maintain the lowest leverage in our peer group. In 2017, we deployed \(7.3 billion in capital and significantly outperformed the Bloomberg Mortgage REIT index. Since inception, our common stock has earned a nearly 11.5% annual total return, or a 131% cumulative total return, and paid out over \)3.7 billion in dividends to our shareholders.

## Starwood Property Trust's Evolving Strategy

![](images/2_1.jpg)

Figures as of December 31, 2017, unless otherwise noted.

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## Size Matters:

We are the largest commercial mortgage REIT, and that affords us significant benefits of scale. We have invested over \(40 billion and taken \)0 in realized loan losses since inception. That is not an accident. We use our scale, relationships, structuring capabilities and best in class financing techniques to create double digit annual returns for our shareholders while taking appropriate risks.

In addition to our almost 350 dedicated employees, our manager's parent, Starwood Capital Group, has over 3,000 additional employees in 11 offices globally. Combined, we have the scale to underwrite almost any opportunity globally, and by design do not allocate opportunities between vehicles with overlapping investment objectives. STWD is a beneficiary of the best risk-reward loans sourced globally that meet our target return hurdles and new businesses such as the residential mortgage finance business we incubated in 2017.

Starwood Capital Group currently has \(56 billion of assets under management and, in addition to helping STWD source investments, the most senior members of Starwood Capital Group serve on our Investment Committee. This structure provides far more than "checks-and-balances." It provides an opportunity for the highest level of collaboration between management teams to share information, data, structuring ideas and global market trends. Starwood Capital Group's long term track record was recently recognized by the leading global private real estate publication PERE by presenting the firm with numerous honors, including: Global Firm of the Year, Global Capital Raise of the Year, North American Firm of the Year, Industry Figure of the Year and Deal of the Year. This followed PERE's 2016 awards in which Barry Sternlicht received the inaugural Lifetime Achievement Award.

We consider our shareholders to be our partners, and as partners we are proud to offer you the best disclosure in our business, both in this annual report and other communications and filings and in day-to-day interactions. The management team at Starwood Property Trust is proud to have earned NAREIT's Gold award for communications and reporting excellence for the fourth straight year in 2017.

## The "Right-Side" of our Balance Sheet:

Making the best possible credit decisions will always be the foundation of our business, but our cost of capital will determine our ability to keep our leverage significantly below our peers while earning outsized relative returns. Three years ago, we discussed the importance of our corporate bond rating, and stated our goal to become an investment grade bond issuer. We have made significant progress toward that end by increasing the size of our property segment and rotating from secured to unsecured debt.

Since the start of 2017, we have issued \(1.7 billion of unsecured bonds in three separate transactions. The bond markets, in fact, are treating us more like an investment grade company and recognize the resilience of our diversified business model and capital structure. As an example, our February 2018 unsecured bond issuance priced at the tightest spread for a non-investment grade unsecured bond issuance since the great financial crisis and, more importantly, is the cheapest, most flexible debt on our balance sheet. The cost of our secured financing lines has also declined significantly, allowing us to offset tighter loan spreads in today's competitive lending environment without forcing us to either increase our leverage or deviate from our credit-first culture. Being able to offer tighter loan spreads also adds to the duration of our investment portfolio, which is important to our cash management strategy as borrowers are less incentivized to quickly repay their loans.

## Market Conditions:

As we head into a likely higher interest rate paradigm, we expect to realize the benefits from our floating rate loan book as well as the embedded value in the long duration fixed rate debt we utilized throughout our portfolio. Additionally, our special servicer (with nearly $10 billion of assets in special servicing today and an additional $73 billion on which we are named special servicer) will outperform if rates rise or credit spreads deteriorate. It is a common misperception that all REITs underperform as interest rates rise. Although agency mortgage REITs and property REITs will face their own challenges, STWD's business should outperform in a higher rate environment.

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Commercial real estate values were generally flat in 2017, but performance varied widely between subsectors as is illustrated in the chart below. Understanding the drivers of value and opportunity across sectors is more important than ever as we enter the ninth year of this economic recovery. We believe our scale, information advantage and global footprint across all investing sectors will continue to drive relative outperformance. We continue to favor the multi-family sector (in which we added exposure in 2017) and the office sector (which continues to be our largest lending exposure), as we expect to see job and wage growth continue, fueled in part by the historic tax cuts enacted at the end of 2017.

![](images/4_0.jpg)

Source: Green Street Advisors. Property sector indices are indexed to 100 at their '07 peaks.

The Tax Cuts and Jobs Act that was signed into law on December 22, 2017 is likely to create significant value for our taxable U.S. shareholders because U.S. shareholders who are individuals are generally expected to benefit from the 20% deduction applicable to our ordinary dividends, resulting in a reduced ordinary income tax rate for them on interest income we generate. Shareholders in the highest tax bracket will take home just under 12% more in after-tax income than they did under prior law and that same percentage more than they will from a comparable non-REIT investment.

## The Lending Segment:

We have not veered from our mandate at inception as we continue to lend on quality properties in solid locations with great sponsors capable of executing their business plans. By choosing the right partners and properties and financing them in the most efficient ways, we have been able to create sustainable outsized risk adjusted returns.

We continue to invest in the business with an eye on long-term value creation. To that point, we doubled the size of our originations team over the last 18 months to propel us to future growth and outperformance. Relationships and creating the best possible borrower experience matter. Ultimately, we increased our loan volume in this, our largest business or "cylinder," by 47% to nearly $5 billion in 2017. We are also proud of the progress we made incubating our residential lending strategy over the last year, acquiring $680 million of loans.

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The loans feature high coupons, high FICO scores, low LTVs and accretive levered yields and, during the financial crisis, loans with these credit characteristics had virtually no losses. We are able to lever these loans more efficiently than our peers to create outsized returns for our shareholders.

We view the residential lending opportunity similar to residential market we entered in 2011 and ultimately created significant shareholder value. Those assets were ultimately spun-off to shareholders as Starwood Waypoint Residential Trust in 2014 and merged into industry leader Invitation Homes, Inc. (NYSE: INVH). We built STWD to opportunistically invest in underserved segments of the real estate financing markets to create long term shareholder value and will continue to pursue these endeavors.

![](images/5_0.jpg)

Figures as of December 31, 2017, unless otherwise noted. Statistics in pie chart exclude Cash & Cash Equivalents, Restricted Cash, Other Corporate Assets and VIE assets. Accumulated depreciation and amortization are included.

## The Property Segment:

We added to our property segment in the past year and it now comprises approximately 25% of our total assets. We expect to continue to grow and diversify this cylinder on an opportunistic basis with properties we want to own for the long term. In addition to adding attractive yield and duration to our overall investment portfolio, we now have significant gains in our property portfolio that are not marked on our balance sheet. Our property portfolio also provides depreciation which may be used to reduce tax burdens and lower our required payout ratios. Importantly, our high cash returns remaining stable for relatively long periods of time (financed with long fixed rate debt) helps improve our bond rating, which directly correlates to our ability to borrow as cheaply as possible.

## Real Estate Investing and Servicing:

2017 was the first full year that the commercial mortgage-backed securities (CMBS) market operated under the risk retention rules that are mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act that went into effect in late 2016. Our CMBS portfolio continues to perform very well, and the quality of the loans going into CMBS transactions continues to improve post-risk retention, with more investment grade loans and lower LTVs than ever before. Additionally, our conduit originations business continues to be a steady contributor to our bottom line, and is one of a small number of non-bank beneficiaries of risk retention rules due to our scale and standing as a pre-eminent investor and servicer in the CMBS market.

Our servicing business remains profitable, and we have communicated for years that its contribution would diminish over the next few years. We have worked hard to add investment cylinders to replace these earnings. We have significant unrealized gains in the property assets we have purchased out of our servicing trusts and we expect to continue to harvest these gains over the coming years until expected servicing revenues return.

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## Looking ahead:

Our scale and diversification benefit us now more than ever and we will continue to take advantage of opportunities emerging from the increased complexity of the global real estate and financial markets. We are poised to benefit from changing market cycles, and are proud to have earned your trust to find the best risk adjusted investment opportunities in the global markets. While there are many new entrants in our space we expect the market to ultimately reward STWD for our diversified business model and experienced leadership. While the work, investments and proven results are not yet fully reflected in our valuation, we remain committed to forging ahead to build upon our leadership position in the sector and to helping the investment community better appreciate the value being created.

We would like to again thank our shareholders for their support, our Board of Directors for its leadership, and all of the dedicated employees at Starwood Property Trust and Starwood Capital Group for their hard work and expertise. We are proud of the company we have created together, and we will not rest on our laurels. We are very excited about the opportunities in front of us in 2018 and beyond.

Yours very truly,

![](images/6_0.jpg)

Barry S. Sternlicht

Chairman and Chief Executive Officer

![](images/6_1.jpg)

Jeffrey F. DiModica, CFA

President

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