Starwood Property Trust, Inc. — Q1 2020 Form 10-Q
Period: Three months ended March 31, 2020. Starwood Property Trust is a REIT focused on commercial and residential real estate lending, infrastructure lending, property ownership, and real estate investing and servicing.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $312.6 million | $310.5 million |
| Net income (loss) attributable to Starwood | $(66.8) million | $70.4 million |
| Diluted earnings (loss) per share | $(0.24) | $0.25 |
| Net cash from operating activities | $190.7 million | $(92.7) million |
Interest income from loans rose to $217.4 million from $183.4 million, while interest expense declined to $120.0 million from $134.7 million. The $48.7 million credit-loss provision, compared with $0.8 million a year earlier, and $83.9 million of total other losses drove the swing to a GAAP loss. Other losses included a $34.5 million foreign-currency loss and a $45.5 million loss related to consolidated VIEs. The filing does not present a single consolidated operating-margin measure.
Management reported non-GAAP Core Earnings of $162.1 million, or $0.55 per diluted share, versus $83.0 million, or $0.28, a year earlier. Core Earnings excludes specified items, including unrealized gains and losses, credit-loss provisions, and certain compensation and real-estate expenses; it is not a GAAP earnings or cash-flow measure.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $811.7 million and restricted cash was $119.7 million. Total assets were $77.6 billion and total equity was $4.8 billion. The balance sheet includes large consolidated securitization VIE balances whose assets are restricted and whose liabilities are generally non-recourse.
- Debt carrying values included $9.7 billion of secured financing, $0.9 billion of CLOs, and $1.9 billion of unsecured senior notes. Secured financing increased from $8.9 billion at year-end 2019. These figures exclude the separately presented VIE liabilities.
- Operating cash flow was $190.7 million; investing cash outflow was $454.2 million and financing cash inflow was $620.1 million. Cash, cash equivalents and restricted cash increased $356.6 million to $931.4 million.
- Commercial and residential lending weighted-average unlevered yield was 6.8%, versus 7.3% a year earlier; its secured borrowing rate was 3.5%, versus 4.6%. Infrastructure investment yield was 6.1%; its secured borrowing rate was 4.4%, versus 5.0%.
- Management said it believed liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months. The company reported compliance with secured-financing covenants at quarter-end.
Material changes and unusual items
- Revenue was broadly flat year over year, but reported earnings deteriorated sharply amid credit provisions and market-driven fair-value and currency losses.
- Adoption of the CECL credit-loss standard on January 1, 2020 reduced opening retained earnings by $32.3 million. At quarter-end, the company reported $97.3 million of funded loan allowances and $15.0 million for unfunded commitments; management’s broader disclosure gave a $117.3 million allowance for loans, securities and expected funding commitments.
- Four CDO structures in the Investing and Servicing Segment were in default or imminent default at March 31; none were consolidated. Deterioration in collateral values could affect cash distributions on the company’s subordinate CLO interests.
- The company repurchased 1.9 million common shares for $28.8 million under a $400 million authorization. The quarterly dividend declared was $0.48 per share.
- In April, the board authorized payment of the first-quarter base management fee in common shares.
Outlook, risks and contingencies
No numerical earnings guidance was provided. Management emphasized substantial uncertainty from COVID-19 and its effects on borrowers, tenants, property values, credit markets, financing and liquidity. Some borrowers and tenants had requested or indicated they might request payment deferrals, forbearance or other modifications; the filing said no such loan or lease modifications had closed by the reporting date. The company warned of possible delinquencies, defaults, lower rents, asset impairments and lender margin calls. It may preserve liquidity through asset sales, additional financing, stock-based fee payments, or changes to dividends, including a reduction, suspension or payment in kind. Management also identified near-term financing maturities and said it was working with lenders on extensions or alternate facilities.
Investor facts to verify
- Subsequent borrower performance, non-accrual loans, credit-loss assumptions and the extent of requested or completed modifications.
- Liquidity after potential margin calls, loan funding commitments, and upcoming financing maturities or extensions.
- Dividend capacity and whether future distributions or management fees will be paid in shares or otherwise changed.
- Fair-value assumptions for loans, securities and VIEs, and the status and cash-flow impact of the four defaulted or near-default CDO structures.