STARWOOD PROPERTY TRUST, INC. annual report, FY2015

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Business context and reporting period

Starwood Property Trust, Inc. (NYSE: STWD) filed its Form 10-K for the fiscal year ended December 31, 2015. The externally managed REIT operates commercial real estate lending, investing and servicing, and property businesses in the U.S. and Europe. Reported results include substantial consolidation and elimination effects from securitization variable interest entities (VIEs).

Financial results and key metrics

Metric20152014
Revenue$735.9 million$702.9 million
Net income attributable to STWD$450.7 million$495.0 million
Diluted EPS$1.91$2.24
Core Earnings, non-GAAP$517.8 million; $2.19 per diluted share$473.7 million; $2.17 per diluted share
Dividends declared per common share$1.92$1.92
  • Fourth-quarter 2015 revenue was $186.2 million, net income attributable to STWD was $96.5 million, and diluted EPS was $0.40. Fourth-quarter 2014 figures were $178.8 million, $91.5 million, and $0.40, respectively.
  • GAAP net cash provided by operating activities was $612.5 million. Investing activities used $400.8 million and financing activities used $93.6 million; cash and cash equivalents increased $118.1 million to $368.8 million. VIE consolidation affects cash flow presentation.
  • At year-end, loans totaled $6.3 billion, properties were $919.2 million, and total equity was $4.17 billion. Consolidated assets of $85.7 billion and liabilities of $81.6 billion included $76.7 billion of VIE assets and $75.8 billion of VIE liabilities.
  • Total consolidated indebtedness was reported as $5.4 billion; financing arrangements were $4.02 billion and convertible notes had $1.37 billion principal outstanding. The company reported a 54.4% debt-to-assets ratio under its adjusted leverage measure, not the gross GAAP balance-sheet ratio.
  • Cash and cash equivalents were $368.8 million; restricted cash was $23.1 million. Management said liquidity and access to additional liquidity were sufficient for financial obligations for at least 12 months.
  • Lending Segment weighted-average unlevered and levered yields were 8.0% and 10.6%; secured borrowing cost averaged 3.5%. The filing does not provide a clear consolidated net interest margin.

Material changes versus the prior comparable period

  • Revenue increased 4.7%, while net income attributable to STWD fell 9.0% and diluted EPS declined from $2.24 to $1.91. Core Earnings rose about 9.3%, with Core Earnings per share increasing from $2.17 to $2.19; this non-GAAP measure excludes specified items and is not a measure of cash available for distributions.
  • Lending Segment net interest income rose $23.6 million, mainly from higher average loan balances and loan fees associated with prepayments. Its weighted-average unlevered yield eased from 8.2% to 8.0% as credit spreads tightened.
  • Investing and Servicing Core Earnings increased to $249.0 million from $214.3 million, supported by CMBS interest income and lower costs; servicing fees declined. GAAP segment comparisons are affected by changing VIE consolidation and eliminations.
  • The company established a Property Segment and acquired Dublin office and residential properties and affordable housing communities. Year-end properties rose to $919.2 million from $39.9 million.
  • Secured financing agreements increased to $4.02 billion from $3.14 billion. Common stock issuance generated approximately $326 million, while the company repurchased $48.7 million of stock and $118.6 million principal of 2019 convertible notes.

Outlook, management commentary, risks and unusual items

  • Management’s stated objective is long-term risk-adjusted returns, primarily through dividends and secondarily through capital appreciation. Its priorities include expanding lending, subordinate CMBS and servicing, loan syndication and securitization, and targeted property investments. The filing provides no quantified earnings or return guidance.
  • The board declared a $0.48-per-share first-quarter 2016 dividend, payable April 15, 2016. Management intends to continue regular quarterly distributions, but the board retains discretion and the filing gives no assurance that the dividend will be maintained.
  • Year-end loan commitments totaled $1.5 billion, of which management expected to fund $1.3 billion. Construction lending creates future funding and completion risks. A $63.2 million mezzanine loan included $30.9 million more than 90 days past due; it was amended in January 2016 with additional borrower capital, fees, and a 12-month extension. Management reported no individual held-for-investment loans impaired at year-end.
  • Key risks include leverage, refinancing and margin-call exposure, interest-rate and foreign-currency movements, borrower defaults and collateral values, illiquid investments, and competition. The company also disclosed potential conflicts related to its external manager and affiliates, and REIT qualification and Investment Company Act exemption requirements.
  • Notable items included a $5.9 million loss on extinguishment of debt, a $17.8 million gain on a property sale, and a $37.2 million net foreign-currency loss. Fair-value changes and VIE accounting materially affect reported earnings and balance-sheet scale.
  • Subsequent to year-end, 12 additional Woodstar properties were acquired; two more were expected to close in first-quarter 2016. The repurchase authorization was increased to $500 million and extended through January 2017. The company also disclosed that new FHLB rules required repayment of $9.3 million of advances within one year.
  • The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. No material legal proceedings were reported.

Important facts for investors to verify

  • Reconcile GAAP net income and cash flows with Core Earnings and the effects of VIE consolidation, eliminations, and fair-value accounting.
  • Assess the quality, collateral performance, maturity profile, and credit migration of the $6.3 billion loan portfolio, including the amended delinquent mezzanine loan and the $1.3 billion expected funding commitments.
  • Review refinancing needs, facility maturities, covenant headroom, margin-call terms, and the company’s ability to fund commitments while sustaining dividends and share repurchases.
  • Evaluate the sustainability of the $0.48 quarterly dividend against taxable income, operating cash flow, debt obligations, and board discretion.
  • Examine the economics, occupancy, financing, and integration of the Ireland, Woodstar, and REO property acquisitions, as well as related-party arrangements and management fees.