Starwood Property Trust, Inc. — Q2 2020 Form 10-Q
Business context and reporting period
Quarter ended June 30, 2020; filed August 5, 2020. Starwood Property Trust is an externally managed REIT focused on commercial and residential real estate lending, infrastructure lending, property ownership, and real estate investing and servicing in the U.S. and Europe. Results reflect the disruption and uncertainty of the COVID-19 pandemic.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $265.6 million | $311.2 million | $578.2 million | $621.7 million |
| Net income | $153.0 million | $132.4 million | $86.7 million | $209.0 million |
| Net income attributable to STWD | $139.7 million | $127.0 million | $72.9 million | $197.4 million |
| Diluted EPS | $0.49 | $0.45 | $0.25 | $0.70 |
| Net cash from operating activities | Not presented quarterly in the supplied filing text | $769.7 million | $(482.9) million |
- Q2 GAAP revenue fell 14.7% year over year, while STWD-attributable net income increased 10.0%. Six-month revenue declined 7.0% and attributable net income declined 63.1%.
- Q2 costs included a $10.2 million credit-loss provision; the six-month provision was $58.9 million. Adoption of CECL on January 1, 2020 increased the allowance by $32.3 million through a cumulative adjustment to accumulated deficit.
- Management-reported Core Earnings were $126.1 million, or $0.43 per diluted share, in Q2 2020, versus $153.9 million, or $0.52, in Q2 2019. Core Earnings is a non-GAAP measure and is not cash flow or a liquidity measure.
- At June 30, cash and cash equivalents were $347.7 million and restricted cash was $176.4 million. Total assets were $79.6 billion and total equity was $4.9 billion. Net loans were $11.1 billion; properties, net, were $2.2 billion.
- Debt included $8.84 billion of secured financing agreements, $929.3 million of CLO obligations, and $1.93 billion of unsecured senior notes. Consolidated VIE liabilities of $62.6 billion are presented separately; the filing states these obligations generally have no recourse to STWD and related VIE assets are restricted.
- For the first half, cash used in investing activities was $240.8 million and cash used in financing activities was $579.4 million. Cash, cash equivalents, and restricted cash decreased $50.4 million to $524.1 million.
Material changes versus comparable periods
- Lower LIBOR reduced asset yields and interest income, but also reduced borrowing costs. Commercial and residential lending net interest income was $125.6 million in Q2, down $3.3 million year over year; infrastructure lending net interest income was $10.1 million, up $0.2 million.
- Credit-loss expense rose sharply in the first half under CECL, reflecting weaker macroeconomic forecasts and COVID-19-related uncertainty. The filing reports $111.3 million of funded-loan allowances at quarter end and a $9.2 million allowance for unfunded commitments; MD&A gives a total allowance of $127.5 million for loans, securities, and commitments measured at amortized cost.
- Q2 results included fair-value recoveries in mortgage loans and investment securities as credit spreads tightened from first-quarter dislocations. Six-month results also included unfavorable fair-value movements and foreign-currency losses.
- Investing and servicing revenue decreased, including lower servicing fees and CMBS interest recoveries. An owned hotel was closed during the quarter because of COVID-19.
- Q2 included $27.9 million of realized and unrealized gains from a partial sale and revaluation of an investment in a servicing and advisory business, plus a $7.4 million gain on sale of a property.
- Property-segment revenue and expenses were lower, mainly because the Ireland portfolio had been sold in December 2019. The prior-year six-month comparison also included a $68.9 million loss on the Retail Fund investment that did not recur.
Outlook, risks, contingencies, and unusual items
- Management said it believed available liquidity and access to additional liquidity were sufficient for at least the next 12 months, while prioritizing liquidity to meet funding and financing obligations and navigate uncertainty. It anticipated slower loan repayments while pandemic impacts persisted.
- Management said it may raise capital, borrow, sell assets, pay management or incentive fees in shares, or reduce, suspend, or pay future dividends in kind. The board declared a quarterly dividend of $0.48 per share for Q2, payable July 15, 2020; future distributions are not assured.
- During Q2, STWD completed nine payment-related loan modifications covering $887.0 million of principal and $4.4 million of interest deferrals; two additional modifications covering $180.5 million followed quarter end. The company said some borrowers sought deferrals or forbearance, particularly where property cash flows were pressured.
- STWD collected 97% of Q2 rent due, including 98% at its Woodstar affordable housing portfolios, and collected 100% of infrastructure interest due. It reported no property-lease modifications and no infrastructure loan payment modifications in the quarter.
- COVID-19 risks include borrower defaults or deferrals, lower collateral and property values, tenant rent shortfalls, financing-market disruption and margin calls, refinancing and maturity risk, and possible pressure on liquidity and dividends. Management said no COVID-19 contingency had been recorded at June 30, 2020.
- Four CDO structures in the investing and servicing segment were in default or imminent default at quarter end; none were consolidated. The filing also notes that deteriorating CLO coverage tests could reduce or eliminate distributions to subordinate interests.
- The company was in compliance with secured-financing covenants at June 30. It entered agreements with seven secured-credit-facility lenders to temporarily suspend certain credit-mark provisions in exchange for cash repayments, additional collateral, or reduced availability.
- Near-term financing items include $500 million of senior notes due February 2021 and a $700 million note due December 2021. The filing says management was discussing extensions or amendments for facilities with near-term expirations. Subsequent to quarter end, an infrastructure repurchase facility was extended to February 2022.
- Other subsequent event: in July 2020, STWD securitized commercial mortgage loans with $151.3 million principal balance.
Most important facts for investors to verify
- Whether COVID-19-related loan modifications, delinquencies, defaults, and collateral valuations lead to further credit provisions or realized losses.
- Cash availability and financing terms, including margin-call exposure, facility renewals, and the ability to address 2021 maturities.
- The sustainability of the $0.48 quarterly dividend given management’s stated possibility of reducing, suspending, or changing future distributions.
- The composition and recurring nature of GAAP earnings versus Core Earnings, particularly fair-value movements and the $27.9 million investment-related gain in Q2.
- The status and potential cash-flow effects of the four defaulted or imminently defaulted CDO structures and any CLO coverage-test impacts.