Starwood Property Trust, Inc. — Q1 2019 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2019. Starwood Property Trust is an externally managed REIT investing in U.S. and European real estate and infrastructure debt, commercial property, and real estate servicing and investments. Its four reportable segments are commercial and residential lending, infrastructure lending, property, and investing and servicing. Financial amounts below are in U.S. dollars; tables report millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Total revenue | $310.5 million | $260.6 million; up $49.9 million |
| Net income attributable to Starwood Property Trust | $70.4 million | $99.9 million; down $29.5 million |
| Basic and diluted EPS | $0.25 | $0.38 |
| Core Earnings, non-GAAP | $83.0 million; $0.28 per diluted share | $155.8 million; $0.58 per diluted share |
| Net cash from operating activities | $(92.7) million | $92.4 million provided |
| Net cash from investing activities | $(229.6) million | $395.4 million provided |
| Net cash from financing activities | $380.7 million | $(527.1) million used |
| Cash and cash equivalents | $412.3 million | $239.8 million at December 31, 2018 |
| Restricted cash | $133.7 million | $248.0 million at December 31, 2018 |
| Secured financing agreements, net | $9.2 billion | $8.7 billion at December 31, 2018 |
| Unsecured senior notes, net | $1.9 billion | $2.0 billion at December 31, 2018 |
| Total equity | $4.9 billion | $4.9 billion at December 31, 2018 |
Consolidated VIE assets of $57.0 billion and VIE liabilities of $55.7 billion are presented gross on the balance sheet. These securitization assets are restricted to satisfying the VIEs’ obligations, which the filing says have no recourse to the Company’s general credit. They should be distinguished from the Company’s secured and unsecured financing above.
Net interest income in the commercial and residential lending segment declined to $112.9 million from $117.4 million: higher loan and securities interest income was more than offset by increased financing costs. The segment’s overall unlevered yield was 7.3%, versus 7.4% a year earlier. The filing does not provide a consolidated operating-margin measure.
Material changes versus the prior comparable period
- Revenue rose 19% approximately, mainly from higher loan interest income and the inclusion of the infrastructure lending business acquired in September 2018. Infrastructure contributed $28.5 million of revenue and $3.4 million of Core Earnings; no prior-year segment comparison is presented.
- Despite higher revenue, attributable net income fell, reflecting higher interest expense and a $43.2 million loss from unconsolidated entities, compared with a $1.5 million loss in Q1 2018. The Retail Fund investment accounted for a $44.9 million decrease in value during the quarter.
- Core Earnings, a company-defined non-GAAP measure, fell to $83.0 million from $155.8 million. The Property segment reported a $40.3 million Core Earnings loss, primarily reflecting a $68.9 million Core loss on the Retail Fund investment; this differs from the $43.2 million GAAP loss from unconsolidated entities.
- Interest expense increased to $134.7 million from $87.2 million. Management attributed much of the increase in the commercial and residential lending segment to higher borrowing utilization and LIBOR, while loan spreads compressed and prepayment-related income was lower.
- Commercial and residential lending originated $1.0 billion of commercial loans. The Company acquired $237.5 million of infrastructure loans and funded $46.3 million of existing infrastructure commitments. It also securitized $340.2 million of residential mortgage loans.
Liquidity, debt, distributions, and commitments
- Operating cash flow was negative, while cash and restricted cash together were $546.0 million at quarter end. Investing outflows chiefly reflected $1.3 billion of held-for-investment loan originations and purchases, partly offset by loan collections and sales. Financing cash inflow included net borrowing activity and was partly offset by $132.5 million of dividend payments.
- Management stated it believed current liquidity and access to additional liquidity were sufficient for financial obligations for at least the next 12 months. The Company reported compliance with all secured-financing covenants at March 31, 2019.
- During the quarter, the Company entered a $500 million infrastructure repurchase facility, increased the FHLB facility’s maximum capacity to $2.0 billion subject to scheduled reductions, and amended other facilities. These are facility sizes, not statements of immediately available cash.
- Contractual secured financing principal totaled $9.3 billion; the filing’s maturity schedule estimates $415.8 million for the remainder of 2019 and $1.5 billion for 2020, assuming stated conditions and extensions where available. The Company said it routinely discusses extensions or amendments for facilities nearing expiration.
- Commercial and residential lending had $1.9 billion of future commercial loan funding commitments, of which management expected to fund $1.7 billion. Infrastructure lending had $341.8 million of commitments, including revolvers, letters of credit, and delayed-draw term loans.
- The Company declared a quarterly dividend of $0.48 per share for Q1, paid April 15, 2019, and declared another $0.48 per share for Q2, payable July 15, 2019. The filing notes distributions remain subject to operating and debt-service requirements and board authorization.
Management commentary, risks, and unusual items
- Management cited defaults, collateral-value impairment, loan refinancing and repayment timing, financing availability and cost, interest rates, real estate and economic conditions, and competition among principal risks. It also identified the integration and realization of benefits from the infrastructure lending acquisition as a risk.
- Credit monitoring identified certain past-due and non-accrual loans. The Company foreclosed on a grocery distribution facility in Montgomery, Alabama, charging off an $8.3 million allowance; after quarter end it also foreclosed on a separate Orlando grocery facility whose tenant had entered bankruptcy. Total loan-loss allowance was $31.6 million at March 31, 2019.
- The Company expected the forthcoming expected-credit-loss accounting standard to increase loan-loss allowances, but said its estimate of the impact remained in process.
- The remaining $78.0 million principal of 4.00% convertible notes due 2019 was settled with 3.6 million common shares and $12.0 million cash. The Company recognized a $3.3 million loss on extinguishment of debt.
- Lease accounting adopted January 1, 2019 had no material effect; the Company recognized a $12.0 million right-of-use asset and lease liability at adoption. No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective.
- No earnings or financial guidance is provided in the filing. The next-quarter dividend declaration is a subsequent event, not earnings guidance.
Important facts for investors to verify
- Whether the Retail Fund’s valuation decline and related Property segment losses persist, and how the investment is valued in subsequent periods.
- Performance, delinquencies, non-accrual status, collateral values, and loss reserves across the loan portfolio, including the loans discussed as impaired or past due.
- Actual availability and conditions of borrowing facilities, refinancing or extension outcomes, maturity exposure, and liquidity after funding loan commitments and paying dividends.
- Whether interest income growth can offset higher financing costs and spread compression, and the effect of rates and prepayment activity on earnings.
- How the infrastructure lending acquisition performs and integrates, and the eventual effect of the expected-credit-loss accounting standard on reserves and reported results.
- Reconcile GAAP earnings with Core Earnings: Core Earnings is non-GAAP, excludes specified items, and is not a measure of operating cash flow, liquidity, or funds available for distributions.