# Dear Fellow Shareholders

_Source: `DeepSeekOCR_Ardian_pruned_1k/real-estate-reit-mortgage/NYSE_STWD_2018/NYSE_STWD_2018.mmd` · pages 2-8_

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Dear Fellow Shareholders:

It is hard to believe that 2018 was the  \( 10^{th} \)  year since our IPO. We started Starwood Property Trust to fill a void in commercial real estate lending that existed after the financial crisis. We set out to build a sustainable enterprise – not a collection of mortgage loans. We would like to thank our shareholders and partners, many of whom have been with us from the beginning, for trusting us as stewards of your capital as we have strategically diversified our company across the core competencies of our manager, Starwood Capital Group.

## STWD Primary Investment Cylinders

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## Year Launched

2018 was another tremendous year for our company, highlighted by our $2.6 billion acquisition of the Infrastructure Lending business from GE. We are now more diversified than at any other point since our initial public offering, with a $16 billion balance sheet and a broad opportunity set in which to invest, matched with best in class financing sources that allowed us to deploy a record $11.6 billion of capital in 2018.

We believe our dividend yield today is very attractive at a 6% premium to 10-year treasuries. We have purposefully built a generational multi-cylinder vehicle and have a multitude of options in which to deploy capital. We invest in what we perceive at the time as the best available risk-adjusted value opportunities across our multiple business lines. We continue to run our business with low leverage, and have a conservative balance sheet that efficiently utilizes off-balance sheet leverage rather than relying solely on asset-specific financing.

As one of the only mortgage REITs that has diversified to owning real property assets, we have been able to create unrealized gains that can be harvested in the future. We estimate those gains to be worth approximately $2.00 per share.

We have always treated our shareholders as our partners and insiders own nearly $200 million of our common stock, which we believe to be the largest management and board holdings of any of our peers.

## Investor Day

On December 14th, we welcomed approximately 150 investors and analysts to our investor day in New York City. Management spent over five hours going through each of our business units in detail and the slides and

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audio are available on our website. For the first time, we also provided a detailed analysis of the net operating income and cap rate assumptions of our approximately $3.5 billion owned real estate portfolios that support over $500 million in unrealized gains. These potential gains prove out our thesis that adding long duration, high quality investments with high cash yields would ultimately give us stable and growing cash flows and a potential source of future equity capital that can create incremental earnings as we ultimately reinvest those gains over time at higher returns.

Owning a diversified property portfolio with large unrealized gains makes our GAAP book value, and thus our price-to-book ratio, less relevant than others in our space. Our fair value is further understated by the requirement under GAAP to depreciate our assets, notwithstanding the fact we think they have appreciated in value.

Our shareholders have realized a 194% total return since our inception (or 12% per year). As you see in the following chart we presented at our investor day, adding back accumulated depreciation on our property portfolio of \(0.94 per share, and the fair market adjustment of \)2.09 per share, our adjusted book value goes up almost 18%, to \(20.08 from \)17.05. While there could be additional upside to this adjusted book value, even without it, our premium to adjusted book value is significantly below our closest peers today despite having created what we view as an extremely durable investment. We believe the diversified company we have built should move away from book value as a grounding value metric.

Illustrative Upside to GAAP book value per share

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Data as of September 30, 2018 as presented at STWD 2018 Investor Day on December 14, 2018

 \( ^{1} \)  Includes amount attributable to Woodstar II Class A unit holders for units issued through November 30, 2018

 \( ^{2} \)  Represents management's current estimate of the fair market value. The determination of fair market value is subjective and based on several factors, which are subject to change, and there can be no assurance that management's current estimates of the fair market value of STWD's assets would not differ materially from the values that could be obtained upon a current liquidation of such assets.

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## Large Loan Lending

More than half of our 2018 investment volume came from our core business, large loan lending, which originated $6 billion of loans, up 43% versus 2017. We more than doubled our international originations in 2018 as compared to 2017. We expect another strong originations year in 2019, with international originations expanding further.

We were proud to have over 50% repeat borrowers, a benefit of our relationships, scale, tenure, and our "cradle to grave" borrower experience where we internally originate, underwrite and asset manage every loan in our portfolio. Our average loan size for new originations and acquisitions in 2018 was once again in excess of $100 million, and we believe our scale and ability to underwrite very complex transactions significantly narrows the competitive landscape.

## Capital Markets

Our capital markets team was again able to lower our borrowing spreads in 2018. We were happy to be put on "upgrade watch" in the third quarter by Moody's. We believe that our low leverage, diversified model and \(3.5 billion property portfolio will allow us to earn an even higher bond rating in the coming years, which will ultimately lead to even lower financing spreads. In addition to opportunistically issuing best-in-class unsecured debt in 2018, we increased the capacity in our financing facilities, adding \)3.8 billion in capacity across 12 facilities, bringing our total capacity to \(13.4 billion across 43 facilities. We also reduced our reliance on on-balance sheet financing by executing two single-borrower securitizations and executing a significant amount of first mortgage sales. Through these actions we were able to continue producing consistent returns in our large loan lending business. It is worth noting that in the last year, we used our financing advantage and global reach to sell off large first loss positions on many of our largest and most complex originations, leaving us with a more senior position in the capital structure at a similar optimal yield.

## Starwood Infrastructure Finance

We are very excited to have acquired a market leading platform to originate and acquire loans on energy infrastructure projects. The vast majority of the portfolio we acquired from GE are loans on power plants with contracted revenue from investment grade counterparties, strong sponsors and minimal exposure to underlying commodity prices. We have begun the process of selling the lowest-yielding loans in this portfolio and replacing them with new loans that will have a more positive earnings contribution.

## Residential Lending

Our residential lending business continued investing in non-QM loans to high-quality, low risk borrowers (724 FICO, 66.4% LTV on 2018 originations) who have been unable to access the more traditional agency mortgage market. In 2018, we acquired $844 million of non-QM loans.

The securitization market continues to develop as institutional investors gain comfort with underwriting standards across the industry and the number of securitizations executed in 2018 was nearly triple that of 2017. In August, we closed our first non-QM securitization with 94% of the $374 million transaction receiving an investment grade rating. We followed this successful transaction with a $280 million securitization in November with 92% of the transaction receiving an investment grade rating. In 2019, we expect the securitization markets to continue being a source of long term, match funded financing for high-quality residential loans.

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## Real Estate Investing & Servicing

Our Real Estate Investing and Servicing segment obtained 8 new servicing assignments in the fourth quarter and a total of 35 in fiscal year 2018, which totaled \(21 billion in unpaid balance and brought our servicing portfolio up to 176 trusts with an unpaid balance of \)84 billion. When we purchased LNR in 2013, we were the special servicer on $127 billion of CMBS, which fell to below $69 billion in the third quarter of 2017. Through partnerships, investments and third-party assignments, we have managed to significantly increase our servicing portfolio despite the runoff of our CMBS 1.0 book. We expect these assignments to produce incremental income for our special servicing business well into the future, and this activity, which benefits from broader market distress, should continue to provide a hedge against our asset base.

While credit spreads widened in December as global markets weakened, a lower supply pipeline and tightening credit markets have moved spreads today to the tightest levels in years. This spread compression helped our CMBS portfolio continue to perform very well. Our CMBS origination business, Starwood Mortgage Capital, continued to grow market share among non-bank lenders and for the first time in our history wrote over 20% of all non-bank CMBS loans in the second half of 2018. We benefitted from tremendous historical collateral performance, long-term relationships and the standing of the Starwood brand in the marketplace.

## Property Portfolio

We have added approximately \(3.5 billion in owned real estate over the last four years. This portfolio has performed exceedingly well, with occupancy over 97%, significant rental growth and unrealized gains in excess of \)500 million. Interest rates have risen significantly since we purchased this portfolio, and the yield curve has flattened dramatically, with forward LIBOR now below current LIBOR. Much of our property specific financing is fixed and long duration to match our predictable cash flows. With short-term borrowing rates higher, it would be very hard to create a book of core owned assets like ours with a double digit cash-on-cash return, in excess of our dividend.

- Our Florida multifamily portfolio is 99% leased and has realized rent increases well in excess of our underwriting. Half of our portfolio is located in the Orlando Metropolitan Statistical Area ("MSA") which experienced 4% job growth in 2019, the highest of any MSA in the country. \( ^{1} \)  These apartment investments are extremely consistent and durable and the estimated appreciation in this portfolio comprises nearly half of the overall gains in our Property segment.

- Through sales in 2018, our Master Lease Portfolio has returned approximately half of our initial invested equity and left us with a core portfolio of 16 assets earning higher cash yields with long-term fixed-rate financing.

- Our Dublin portfolio continues to benefit from higher rents and lower cap rates. In October we refinanced this portfolio with 7 year fixed rate debt at just 1.93%, which lengthened our debt and increased our cash returns on the portfolio.

- Our Medical Office portfolio, which was our largest single purchase to date, has also benefitted from lower cap rates on similar assets.

We will continue to seek opportunities to acquire additional assets and potentially sell assets in this portfolio in order to increase our earnings power from this segment.

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## Outlook

We enter 2019 with lower global interest rates, reflecting a slowdown in global growth. In the fourth quarter of 2018 alone, the 10-year treasury rallied 50bps. The 10-year treasury rate has started each of the last 5 years in a tight range between 2.25% and 2.75%. With interest rates stable, real estate cap rates have also remained stable. The March 2019 Prequin report shows there is $340 billion of dry powder earmarked for commercial real estate, and there is ample availability of senior and mezzanine debt. With that, we foresee a stable investing environment across sectors and will continue to pivot between our investments to find the best risk-adjusted returns globally for our shareholders. We will continue to strengthen our balance sheet and run our business at conservative leverage levels.

Coming off record originations in our core commercial real estate lending business, we believe we will have ample opportunities to add accretively to that business in 2019. We also plan to reallocate capital within our energy infrastructure business and continue to grow our residential non-QM platform. Finally, we are buoyed by the large embedded gains in our Property portfolio, which could allow us to grow without significant reliance on the capital markets.

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. Our outlook is strong, and we look forward to continuing to create long-term shareholder value in 2019.

Yours very truly,

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Barry S. Sternlicht

Chairman and Chief Executive Officer

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Jeffrey F. DiModica, CFA

President