Starwood Property Trust, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Starwood Property Trust is a REIT focused on commercial real estate lending, investment and servicing in the U.S. and Europe. Its two reportable segments are Real Estate Lending and Real Estate Investing and Servicing.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total revenue | $178.8 million | $172.0 million; up 4.0% |
| Net income attributable to Starwood Property Trust | $120.4 million | $120.6 million |
| Diluted EPS | $0.52 | $0.60 |
| Core Earnings, non-GAAP | $123.7 million; $0.55 per diluted share | $121.5 million; $0.61 per diluted share |
| Net cash from operating activities | $114.1 million | $104.3 million |
| Cash and cash equivalents at March 31 | $360.7 million | $255.2 million at December 31, 2014 |
| Common dividend declared | $0.48 per share | $0.48 per share in Q1 2014 |
Total costs and expenses were $121.4 million, including $50.5 million of interest expense. Income before tax was $136.7 million; the tax provision rose to $16.0 million from $5.6 million. Other income included a $17.1 million property-sale gain and $24.6 million net derivative gains, partly offset by a $30.3 million foreign currency loss. Other comprehensive loss was $16.5 million.
At March 31, total assets were $112.0 billion and total equity was $3.9 billion. These totals include $103.4 billion of consolidated VIE assets and $102.7 billion of VIE liabilities, which are restricted to the VIEs and have no recourse to the Company’s general credit. Excluding those VIE balances, the balance sheet shows $6.0 billion of loans held for investment, $3.7 billion of secured financing agreements and $1.3 billion of convertible notes. Secured financing agreements increased from $3.1 billion at year-end; convertible note carrying value fell from $1.4 billion following repurchases.
Cash flow for the quarter comprised $114.1 million provided by operations, $325.8 million used in investing and $322.7 million provided by financing. The Company originated or purchased $649.9 million of loans held for investment and paid $108.2 million in dividends.
Material changes versus the comparable period
- Revenue grew mainly from higher lending-segment interest income as the loan portfolio expanded; lending-segment net interest income increased $9.7 million.
- Net income attributable to the Company was nearly flat, while diluted EPS declined to $0.52 from $0.60. Core Earnings increased in dollars but declined per share to $0.55 from $0.61.
- Interest expense increased to $50.5 million from $37.8 million, reflecting higher financing balances and the 2014 issuance of convertible notes. General and administrative expense fell to $35.3 million from $46.1 million, primarily due to lower Investing and Servicing segment compensation and nonrecurring legal costs.
- Foreign currency and derivative results were unusually volatile: derivative gains were $24.6 million versus a $7.9 million loss a year earlier, while foreign currency results were a $30.3 million loss versus a $1.5 million gain.
- Consolidated VIE assets and liabilities decreased from $107.8 billion and $107.2 billion, respectively, at December 31. Their consolidation materially affects reported balance-sheet and income-statement presentation.
Outlook, risks and unusual items
- Management said liquidity and access to additional liquidity were sufficient to meet financial obligations for at least the next 12 months. No earnings or revenue guidance was provided.
- The Company entered conditional agreements to acquire 13 Dublin properties for approximately €452.5 million, subject to customary closing conditions and definitive agreements for three additional properties.
- After quarter-end, the Company issued 13.8 million common shares in an offering, generating approximately $326.1 million of gross proceeds. The board also declared a $0.48-per-share Q2 dividend.
- Future loan-funding commitments totaled $2.0 billion, of which management expected to fund $1.7 billion. The contractual-obligations table lists $1.727 billion of loan funding commitments, mainly due within three years; funding is generally conditional.
- Financing maturities, asset repayment timing, borrower defaults, collateral values, interest rates, currency movements, and access to funding are key risks. A temporary increase in the Borrowing Base facility to $450 million expires in June 2015; the Company said it was discussing extensions or amendments for facilities with near-term expirations. It was in compliance with financing covenants at March 31.
- One CDO structure was in default and was not consolidated. Maximum loss exposure for VIEs not consolidated was $213.3 million at fair value. Management reported no impairment charges on held-for-investment loans; about $3.1 million of loans were 90 days or more past due, and the allowance was $6.3 million.
- The Company repurchased $104.1 million principal amount of 2019 convertible notes for approximately $119.9 million, recording a $5.3 million loss on extinguishment. The repurchase program had $117.1 million of remaining capacity at quarter-end.
- Management identified no material change in previously disclosed risk factors, no material pending legal proceedings, and no material change in internal control over financial reporting. Forward-looking results remain subject to the risks described in the filing.
Important facts for investors to verify
- Reconcile GAAP earnings and diluted EPS with non-GAAP Core Earnings, including the company’s adjustments and per-share calculation.
- Assess recurring earnings separately from the property-sale gain, fair-value movements, foreign exchange effects, derivative gains and debt-repurchase loss.
- Review available liquidity against the $1.7 billion expected loan funding, near-term financing maturities and the temporary Borrowing Base capacity increase expiring in June 2015.
- Distinguish the Company’s own financing obligations from consolidated VIE liabilities, and verify the nonrecourse nature and associated investment exposure.
- Monitor loan credit ratings, delinquency and loss reserves, as well as progress and funding requirements for the Dublin acquisition.
- Consider share dilution from the post-quarter 13.8 million-share offering and the sustainability of the $0.48 quarterly dividend relative to earnings, cash needs and REIT distribution requirements.