Starwood Property Trust, Inc. — Q1 2017 Form 10-Q
Business context and period. The company is an externally managed REIT focused on commercial real estate lending, investing and servicing, and property ownership in the U.S. and Europe. This summary covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless otherwise noted. Consolidated statements include large securitization VIE balances that are generally nonrecourse and can obscure underlying operating trends.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 / comparator |
|---|---|---|
| Total revenue | $198.7 million | $195.5 million; up 1.7% |
| Income before other income, taxes and non-controlling interests | $33.8 million | $49.2 million |
| Net income | $102.9 million | $27.0 million |
| Net income attributable to STWD | $102.4 million; $0.39 per diluted share | $26.7 million; $0.11 per diluted share |
| Core Earnings (non-GAAP) | $131.8 million; $0.51 per diluted share | $118.9 million; $0.50 per diluted share |
| Operating cash flow | $(196.0) million | $131.1 million |
| Investing cash flow | $(286.1) million | $(323.7) million |
| Financing cash flow | $93.8 million | $182.9 million |
| Cash, cash equivalents and restricted cash | $262.5 million at quarter-end | $650.8 million at year-end 2016 |
| Common dividend declared | $0.48 per share | $0.48 per share in Q1 2016 |
Revenue mix included $111.9 million of loan interest, $15.2 million of investment-security interest, $14.1 million of servicing fees and $57.0 million of rental income. Interest expense was $65.9 million, versus $56.5 million a year earlier. The filing does not provide a single consolidated operating-margin measure.
At March 31, 2017, assets were $70.5 billion, liabilities $65.9 billion and equity $4.5 billion. These totals include $60.2 billion of VIE assets and $59.1 billion of corresponding VIE liabilities. Excluding those VIE balances, the company reported $4.4 billion of secured financing agreements and $2.0 billion of unsecured senior notes; it also had $35 million of secured borrowings on transferred loans. Cash and cash equivalents, excluding restricted cash, were $222.5 million.
Net loans were $6.6 billion, including $6.2 billion held for investment and $340.3 million held for sale. Approximately 91.6% of held-for-investment loans were floating-rate. The loan-loss allowance was $9.5 million. Management reported no impaired loans and none 90 days or more past due; 7.6% of loans subject to its rating system were rated 4 or 5.
Material changes versus the prior comparable period
- STWD-attributable net income increased by $75.7 million. The main driver was the swing in the VIE-related fair-value line to a $69.2 million gain from a $4.2 million loss. The improvement also reflected lower derivative losses; results therefore should not be read as a comparable increase in recurring lending income.
- Revenue rose modestly, but pre-other income fell to $33.8 million from $49.2 million as total expenses increased to $164.9 million from $146.3 million. Property-segment revenue benefited from the full-quarter contribution of the Medical Office and Woodstar portfolios; servicing fees and lending interest income declined.
- Operating cash flow shifted to a $196.0 million outflow, reflecting loan production and working-capital movements; cash used in investing was $286.1 million. Cash, cash equivalents and restricted cash fell by $388.4 million during the quarter.
- Secured financing agreements, net, increased to $4.4 billion from $4.2 billion at year-end 2016. Unsecured senior notes, net, increased to $2.0 billion from $2.0 billion, following issuance of $250 million of 2023 convertible notes and repurchase of $230 million principal amount of 2018 notes.
Outlook, commentary, risks and unusual items
- Liquidity and outlook: Management said it believed available liquidity and access to additional liquidity were sufficient to meet obligations for at least the next 12 months. No earnings or investment guidance was provided. Management intends to continue regular quarterly dividends, subject to operating and debt-service requirements and board authorization.
- Funding and maturities: The company had $1.26 billion of loan-funding commitments in its contractual-obligations table, and separately disclosed $1.5 billion of future commitments on 55 loans, of which it expected to fund $1.3 billion. Near-term facility extensions or amendments may be needed; the company said it was discussing such facilities with lenders. It was in compliance with financing covenants at quarter-end.
- Debt refinancing item: The March issuance and repurchase transaction resulted in a $5.9 million GAAP loss on extinguishment. Management excluded the loss from Core Earnings and said it would amortize it over the 2023 notes’ term.
- Fair value and credit risks: Significant valuations rely on Level III inputs, including for loans held for sale, servicing rights and VIE positions. Management noted that estimates depend on projected cash flows and discount rates and may differ from actual results. Risks include borrower defaults, collateral impairment, interest-rate and currency movements, financing availability, liquidity and refinancing mismatches.
- Other exposures: One unconsolidated CDO structure was in default. The company’s maximum loss exposure to unconsolidated securitization VIEs was $15.5 million; it also had $134.5 million invested in passive unconsolidated VIEs and $15.5 million of related unfunded commitments. Management reported no material change in previously disclosed risk factors and no material pending legal proceedings.
- Subsequent events: In May 2017, shareholders approved equity plans authorizing up to 11 million awards. The board declared a second-quarter dividend of $0.48 per share, payable July 14, 2017.
Important facts for investors to verify
- How much of the sharp GAAP earnings increase reflects repeatable segment performance versus VIE fair-value movements and derivative marks; compare GAAP earnings with the company’s non-GAAP Core Earnings adjustments.
- The cash and liquidity available for operations after considering restricted cash, debt repayments, dividend payments and expected loan-commitment funding.
- Facility renewal and refinancing progress, particularly facilities with near-term maturities, and the effect of LIBOR increases on borrowing costs and net interest income.
- Credit quality trends in the loan portfolio, including the risk-rated 4 and 5 exposures, collateral performance, and the adequacy of the allowance for loan losses.
- The assumptions and sensitivity underlying Level III valuations, VIE-related earnings and servicing-rights fair values.
- Dividend coverage and the sustainability of the $0.48 quarterly dividend in light of cash flows, REIT distribution requirements and debt-service needs.