U.S. Securities and Exchange Commission
Washington, DC 20549
NOTICE OF EXEMPT SOLICITATION
1. Name of the Registrant:
STARWOOD PROPERTY TRUST, INC.
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2. Name of the person relying on exemption:
CTW INVESTMENT GROUP
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3. Address of the person relying on exemption:
1900 L STREET, NW, SUITE 900 WASHINGTON, DC 20036
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4. Written materials. Attach written materials required to be submitted
pursuant to Rule 14a6(g)(1):
CTW INVESTMENT GROUP
April 8, 2014
PLEASE WITHHOLD SUPPORT FOR THE RE-ELECTION OF INSIDE DIRECTOR JEFFREY G.
DISHNER AND COMPENSATION COMMITTEE CHAIRMAN RICHARD D. BRONSON AT STARWOOD
PROPERTY TRUST'S (NYSE: STWD) ANNUAL MEETING ON APRIL 30, 2014.
Dear Starwood Property Trust shareholder:
We are writing to urge you to WITHHOLD SUPPORT FROM STARWOOD PROPERTY TRUST
(STWD) INSIDE DIRECTOR JEFFREY G. DISHNER AND COMPENSATION COMMITTEE CHAIRMAN
RICHARD D. BRONSON at the STWD annual meeting of shareholders to be held on
April 30th. In our view, the current STWD board of directors lacks the
credible independence essential to mitigating the inherent conflicts of
interest and governance challenges of the externally-managed REIT structure
Of particular concern:
- Several current Directors deemed "Independent" by the board have ties to
Starwood Capital, the parent company of STWD's manager, or its CEO &
Chairman Barry Sternlicht;
- 43% insider board representation - among the highest of its peer group;
- Steep rise in both management and outside director fees;
- The combined positions of CEO & Chairman;
- Overlapping directorships between Mr. Sternlicht and STWD's Lead
Independent Director;
- An overextended CEO now serving on a total of six public company boards;
and
- Increasing number and value of transactions between STWD, Starwood Capital
and its affiliates.
Greater board independence is critical as STWD navigates what could be a
profoundly challenging period for the mortgage-REIT sector and as the company
continues to expand its risk profile. With the current board structure giving
outsized influence to the external manager, an affiliate of Starwood Capital,
we believe a necessary first step in strengthening independence should be the
replacement of its least senior representative, Mr. Dishner, an EVP of
Starwood Capital with an independent Director who has no affiliations with
Starwood Capital or its executives. In addition, the steep rise in management
and outside director fees and excessive one-time equity grants cause us to
question the Compensation Committee's current policies. This coupled with the
numerous overlapping directorships that our Compensation Committee Chair, Mr.
Bronson, shares with our CEO shakes our confidence in his ability to lead this
committee.
The CtW Investment Group works with pension and benefit funds sponsored by
affiliates of Change to Win to enhance long-term shareholder value through
active ownership. These funds have over $250 billion in total assets under
management and are substantial STWD shareholders. We detail our concerns below.
STWD's INCREASINGLY RISKY INVESTMENTS REQUIRE A GREATER LEVEL OF OBJECTIVE
OVERSIGHT
In several categories of assets our c'mpany is moving into riskier
investments. Over the past year STWD's portfolio of loans classified as 4's,
whose sponsors have credit history that include, "missed payments, past due
payment, and maturity extensions" has gone from 3.3% of the loan portfolio to
5.5%. In 2012 there were no unclassified loans, while in 2013 there are more
than $200 million worth of unclassified loans, whose risks we are unaware of.
While the addition of LNR and expansion in European assets has grown the
asset base of our company, integrating these remains an untested strategy and
brings new challenges and conflicts.
1900 L Street, NW, Suite 900 Washington, DC 20036
202-721-6060
www.ctwinvestment group.com
In 2013, our company engaged in hundreds of millions of dollars of new
transactions with companies dominated by our manager, its affiliates or
executives. This is in addition to the co-investments at Mammoth Mountain,
701 Seventh Avenue, SEREF and LNR in which we were already parties.
While one of the key strengths of our company is our ability to invest
alongside our manager and its affiliates, many of the related-party
transactions conducted in the last year were not co-investments but direct
engagements. Our manager or its executives were direct parties to the spin-off
of SWAY, purchase of a regional mall securitization and purchase of B-notes
on an Austin, Texas office complex. Given our company's increasing risk and
the growing value of transactions where our manager is a party we need to
ensure that we maintain strong controls.
STWD BOARD INDEPENDENCE SHOULD BE STRENGTHENED
Unfortunately over the past year it seems that many of the controls in place
at our company have grown weaker. The threshold for investments that must
receive full board approval has gone from $150 million to $250 million. And
the threshold for investments that require only the approval of the
investment committee of our Manager has doubled from $75 million to $150
million. Undoubtedly changes were due given the growth of our company, but
these changes could have been made in the context of improving broader
corporate controls and a splitting of responsibilities.
Maintaining a seven-member board with three inside directors (Messrs.
Sternlicht, Fellows, and Dishner) is excessive in our view. This is
particularly true considering Mr. Sternlicht already wields a significant
amount of control due to his joint role as CEO and Chairman of the board.
In addition, Mr. Sternlicht now serves on a total of six public company
boards as well as the boards of many private interests and not-for-profits.
This is concerning, as six public boards is, by any standard, an exorbitant
number of commitments for an active CEO, and it seems to indicate the current
board is unable to ensure that Mr. Sternlicht is not unduly distracted.
Our concerns over board independence are only heightened by the steep rises in
management and director fees. Director retainers have increased by around 80%
over the past two years. This is overshadowed however by increases in
management fees. Total management fees, including base fee, incentive fee and
other reimbursements, have gone up by 145% since 2011 but of most concern are
the one-time equity grants to the manager. From 2009 through 2013, a sum of
over $60 million in equity awards was granted to the manager. By contrast,
in the first month of 2014 alone the company granted over $70 million in new
awards. In addition to that, the same management team was handsomely rewarded
with new equity awards at the spinoff of SWAY, getting 777,754 shares in
addition to the 1.6% interest in SWAY they already received by virtue of the
distribution to common shareholders.
Richard Bronson, who serves as our Lead Independent Director and the Chair of
our Compensation Committee, serves on several other company boards alongside our
Chairman and CEO. At TRI Pointe Homes he is also the lead independent director
and Mr. Sternlicht is the Chairman. At Starwood WayPoint, Mr. Sternlicht is a
trustee and Mr. Bronson is again a member of the board of directors. Given the
numerous affiliations shared by Mr. Bronson and Mr. Sternlicht, it may be
difficult to ensure that independent judgment and scrutiny are being exercised.
In light of this and given the current trajectory of manager and director fees,
we do not consider Mr. Bronson an appropriate choice for Compensation Committee
Chair.
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Finally, we note that STWD compares poorly to its peers in terms of board
independence. Of 38 peers STWD is one of nine companies whose boards are less
than two-thirds independent./1/ Of that same group STWD is one of the five
companies with the lowest proportion of independent board members. Several
directors have affiliations that could compromise their independence
As STWD's risk is increasing and the company is entering new lines of business,
a strong and independent board would most effectively oversee the company's
strategic choices and relationship with the manager. We are concerned with
several of STWD's current directors who are deemed independent by the company.
While they appear to be in compliance with the NYSE's definition of
independence, investors recognize that the NYSE's rules on director
independence are minimum requirements that do not capture all potential
conflicts of interest a director may have with a company or its executives.
These directors have relationships with Starwood Capital or its Chairman &
CEO Sternlicht that could undermine their ability to serve as effective
monitors of the STWD/Starwood Capital relationship:
- Camille Douglas is a senior advisor for the LeFrak Organization. Affiliates
of the LeFrak Organization joined with Starwood Capital in 2009 to purchase
a $4.5 billlion portfolio of assets of the failed Corus Bank. The joint
venture still operates today as ST Residential. In referencing the board's
determination of independence for Ms. Douglas this year's proxy states,
"the Board of Directors took into account a joint venture between Starwood
Capital Group, an affiliate of the Company, and the LeFrak Organization, for
which Ms. Douglas is a Senior Vice President and Advisor, which exists for
the purpose of building a hotel in Miami, Florida." In light of this
relationship, we believe the financial ties between STWD's manager and
Ms. Douglas' primary corporate affiliation call into question her ability
to exercise independent judgment on issues related to Starwood Capital.
- Richard Bronson serves on three boards of companies where Mr. Sternlicht is
the Chairman: TRI Pointe Homes, Starwood Waypoint Residential and Starwoord
Property Trust. It is troubling to us that for most of his public company
board experience he seems to have been recruited by Mr. Sternlicht, and we
question how this may impact his status as an independent director,
especially given the importance of his roles as Lead Independent Director
and Compensation Committee Chair at STWD.
- Jeffrey DiModica directs MBS sales and strategy for the Americas at Royal
Bank of Scotland (RBS). STWD has acknowledged some potential for conflicts
of interest given Mr. DiModica's role at RBS, and has adopted a policy that
limits transactions with RBS to the greater of $1 million or 2% of the
RBS's consolidated gross revenues. In our view, this threshold does not
provide much protection against conflicts, as RBS is one of the largest
companies in the world and two percent of gross revenues for RBS amounts to
nearly $500 million. More importantly, this threshold does not appear to
apply to Starwood Capital./2/ Mr. DiModica therefore is in a position to
be evaluating decisions made by Starwood Capital for STWD, while
conducting business with Starwood Capital at RBS.
Here, we believe that an assessment of STWD director independence should include
an analysis of directors' relationships with Starwood Capital and its
executives. Starwood Capital dominates the REIT and executives of Starwood
Capital direct STWD's strategy, operations and daily functioning. While this
arrangement may provide
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/1/ Peer companies included 24 companies identified by ISS, 12 identified by
Starwood for executive compensation comparison, and three peer mortgage REITs:
Annaly Capital Management, MFA Financial, and Two Harbors Investment Corp.
/2/ In fact, Starwood Capital bid on a $1.5 billion RBS loan book in 2011,
see Starwood Capital Group," EuroProperty Magazine. Oct 17, 2011.
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PLEASE DO NOT SEND US YOUR PROXY CARD AS IT WILL NOT BE ACCEPTED.
a competitive advantage to STWD, it should be carefully overseen by an
independent board of directors because the interests of Starwood Capital may not
always be aligned with those of STWD shareholders.
CONCLUSION
While Jeffrey Dishner has many years of experience in commercial real estate,
the board should be able to access his expertise given his position as an
executive of the company. It is our view that the presence of STWD's Chairman &
CEO as well as its President on the board of directors should be sufficient to
representthe perspective of management. We believe that shareholders will
benefit from added independence and that Mr. Dishner should be replaced with a
director that has no affiliations with STWD or Starwood Capital. In addition,
we believe Mr. Bronson should no longer serve on STWD's compensation committee.
This view is supported by the steep increases in manager and director pay and by
the numerous overlapping directorships with Mr. Sternlicht. We urge you to join
us by WITHHOLDING SUPPORT FROM INSIDE DIRECTOR JEFFREY G. DISHNER AND
COMPENSATION COMMITTEE CHAIRMAN RICHARD D. BRONSON to communicate to the STWD
board the importance of greater board independence. If you would like to
discuss our concerns directly with us, please contact us at (202) 721-6060.
Sincerely,
/s/ Dieter Waizenegger
Dieter Waizenegger
Executive Director, CtW Investment Group
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THIS IS NOT A SOLICITATION OF AUTHORITY TO VOTE YOUR PROXY.
PLEASE DO NOT SEND US YOUR PROXY CARD AS IT WILL NOT BE ACCEPTED.