STWD

Starwood Property Trust, Inc. - 10-Q Summary (Period Ended June 30, 2010)

Business Context and Reporting Period

Starwood Property Trust, Inc. (SPT) is a Maryland corporation organized as a Real Estate Investment Trust (REIT) that commenced operations on August 17, 2009. The Company focuses on originating, investing in, and managing commercial mortgage loans, commercial mortgage-backed securities (CMBS), and residential mortgage-backed securities (RMBS). This report covers the quarterly and six-month periods ended June 30, 2010. The Company is externally managed by SPT Management, LLC.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Expansion: Loans held for investment increased significantly from $214.5 million at December 31, 2009, to $865.4 million at June 30, 2010, driven by $652.9 million in new loan acquisitions and originations.
• Liquidity Position: Cash and cash equivalents decreased from $645.1 million to $210.5 million as the Company deployed capital into its investment portfolio.
• Debt Levels: Secured financing agreements increased from $171.4 million to $449.5 million, primarily due to the full drawdown of a $280 million Repurchase Agreement with Wells Fargo Bank.
• Profitability: Net income attributable to SPT for the six months ended June 30, 2010, was $16.8 million, compared to a net loss of $3.0 million for the partial year ended December 31, 2009.
• Unrealized Gains/Losses: The Company recorded a $3.7 million unrealized loss on currency hedges and a $3.4 million unrealized foreign currency remeasurement gain during the period.

Guidance, Outlook, and Risks

Management Commentary: Management believes the Company has sufficient liquidity to meet obligations for the next 12 months. The Company continues to deploy capital into commercial mortgage loans and securities. Core Earnings (a non-GAAP measure) for the six months ended June 30, 2010, were approximately $20.0 million ($0.41 per share).

Dividends: A dividend of $0.25 per share was declared for the quarter ended June 30, 2010. A subsequent dividend of $0.33 per share was declared on August 9, 2010, for the third quarter.

Risks and Contingencies:

• Interest Rate Risk: The Company uses interest rate swaps to hedge variable-rate debt. A 100 basis point increase in LIBOR would increase net investment income by approximately $1.9 million but decrease the net fair value of fixed-rate instruments by approximately $14.3 million.
• Credit Risk: Exposure to defaults by borrowers and impairment of real estate collateral. As of June 30, 2010, no allowance for loan losses was deemed necessary as all loans were performing.
• Forward-Looking Statements: Actual results may differ due to economic conditions, changes in interest rates, and availability of financing.

Key Facts for Investor Verification

• Capital Deployment: Verify the pace of loan origination and acquisition against the $1.2 billion in net investments/commitments mentioned in the MD&A.
• Debt Maturity Profile: Review the repayment schedule for secured financings, with significant principal repayments due in 2011 ($85.8 million) and 2012 ($85.5 million).
• Management Fee Structure: Confirm the calculation of the 1.5% base management fee and the potential for an incentive fee based on Core Earnings exceeding an 8% hurdle.
• Subsequent Events: Note the $69 million participation in a Hyatt Regency New Orleans loan and the acquisition of an $85 million subordinate position in a Columbus, Ohio mall loan closed in July 2010.
• Non-GAAP Reconciliation: Review the reconciliation of Net Income to Core Earnings, specifically the add-backs for stock-based compensation and unrealized foreign currency losses.