Business context and reporting period
Starwood Property Trust, Inc. (NYSE: STWD) filed this Form 10-K for the fiscal year ended December 31, 2020; it is an annual report, not a quarter-only filing. The externally managed REIT invests in commercial and residential real estate debt, infrastructure loans, property equity, and real estate investing and servicing activities across four reportable segments. Its results and asset values were significantly affected by the COVID-19 pandemic and related market volatility.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $1.136 billion | $1.196 billion |
| Net income attributable to STWD | $331.7 million | $509.7 million |
| Diluted EPS | $1.16 | $1.79 |
| Distributable Earnings per diluted share (non-GAAP) | $1.98 | $1.80 |
| Dividends declared per common share | $1.92 | $1.92 |
| Net cash provided by operating activities (GAAP) | $1.046 billion | $(13.2) million |
| Cash and cash equivalents | $563.2 million | $478.4 million |
| Restricted cash | $158.9 million | $95.6 million |
| Total equity | $4.863 billion | $5.137 billion |
Revenue fell about 5% and attributable net income about 35% year over year. Fourth-quarter 2020 revenue was $290.6 million and net income attributable to STWD was $107.0 million. The filing reports no single consolidated net interest margin; segment measures include a 6.7% weighted-average unlevered yield for commercial and residential lending, down from 7.3%, and 5.2% for infrastructure held-for-investment loans and securities, down from 6.4%.
At year-end, total assets were $80.9 billion, including $64.2 billion of consolidated securitization VIE assets, largely offset by $62.8 billion of VIE liabilities. Those VIE obligations are non-recourse to STWD. Excluding VIE liabilities and other specified exclusions, management reported approximately $12.8 billion of consolidated indebtedness: $10.1 billion of secured financing, $0.9 billion of CLO debt, and $1.7 billion of unsecured senior notes. Management said liquidity and access to additional liquidity were sufficient for financial obligations for at least the next 12 months. Cash and restricted cash together were $722.2 million.
Material changes versus the prior comparable period
- Commercial and residential lending net interest income increased to $567.8 million from $469.5 million, reflecting higher average loan balances, prepayment-related income, and lower borrowing costs; lower LIBOR also reduced asset yields.
- Credit loss provision rose to $43.2 million from $7.1 million. Adoption of the CECL expected-loss standard added $32.3 million to the allowance at January 1, 2020; the year-end allowance for loans, securities, and unfunded commitments totaled about $89.2 million.
- Investing and servicing segment results weakened: revenue declined, servicing fees fell, and fair-value changes in CMBS reflected wider credit spreads and pandemic disruption. Segment income before taxes fell to $78.6 million from $294.3 million.
- Property segment reported a $24.9 million pretax loss versus $13.9 million of pretax income in 2019. The comparison reflects the prior-year Ireland portfolio sale and related gains, as well as 2020 derivative losses.
- Infrastructure lending revenue declined to $81.0 million from $106.6 million, but pretax income improved to $24.3 million from $9.4 million, partly due to lower financing costs and a credit-loss reversal.
- Operating cash flow improved materially from 2019. Cash, cash equivalents, and restricted cash increased by $147.0 million during 2020 to $722.2 million.
Outlook, management commentary, risks, and unusual items
Management gave no quantified earnings or revenue guidance. It expects loan repayments to slow while pandemic impacts continue and says it intends to preserve and build liquidity to meet funding and financing obligations and pursue selective investments. Potential actions include raising capital, borrowing, selling assets, paying management or incentive fees in shares, and reducing, suspending, or paying future dividends in kind. The board retains discretion over future dividends; the 2020 declared dividend of $1.92 per share exceeded GAAP diluted EPS but was below non-GAAP Distributable Earnings per share. Distributable Earnings is not GAAP net income or cash flow and excludes specified items, including the 2020 CECL provision.
Five commercial loans with aggregate principal of $699.7 million remained on partial interest deferrals at year-end. STWD reported collecting 98% of property rent due during 2020 and 100% of infrastructure interest due; it made no infrastructure loan payment modifications. Management said collateral generally protects loan principal but acknowledged that some investments may not recover their full principal.
Key risks include pandemic-related borrower defaults, rent shortfalls and collateral declines; margin calls and refinancing or maturity risk; substantial leverage and dependence on secured funding; interest-rate and foreign-exchange exposure; illiquid and Level III-valued assets; concentration in hotels, offices, retail, and power-related infrastructure; and changes in credit-loss estimates. The company also identifies conflicts of interest and dependence on its external manager, REIT and Investment Company Act compliance requirements, and the ongoing transition away from LIBOR. Management said it was in compliance with financing covenants at year-end. Near-term funding items included $700 million of senior notes due December 2021 and $1.34 billion of expected loan and preferred-equity funding commitments; the $396 million FHLB borrowing was repaid in the first quarter of 2021 and the related loans moved to other facilities.
Unusual items include the new CECL accounting standard, significant fair-value volatility, and the 2019 Ireland property sale and Retail Fund impairment that affect year-over-year comparisons. In February 2021, STWD priced a $500 million infrastructure CLO, subject to customary closing conditions. The independent auditor issued unqualified opinions on the financial statements and internal control; its critical audit matter was valuation of Level III residential and commercial mortgage-backed securities. No material pending legal proceeding was reported.
Important facts for investors to verify
- Review the loan-level status, collateral values, and eventual resolution of the five deferred commercial loans totaling $699.7 million, along with delinquencies and the CECL allowance assumptions.
- Assess dividend sustainability using taxable income, cash available after debt service and commitments, and GAAP and non-GAAP results; do not treat Distributable Earnings as a substitute for cash flow.
- Confirm refinancing plans for the $700 million December 2021 notes and other near-term secured maturities, and test liquidity against margin calls and unfunded commitments.
- Examine exposure to stressed property types and regions, infrastructure power-sector concentration, and the effect of pandemic recovery on borrowers, tenants, servicing fees, and fair values.
- Review Level III valuation inputs, related-party transactions and manager fees, and the terms and closing status of the 2021 infrastructure CLO.