Starwood Property Trust, Inc. — 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. Filed November 5, 2015. 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.
Key financial results
| Metric | Q3 2015 | Q3 2014 | First 9 months 2015 | First 9 months 2014 |
|---|---|---|---|---|
| Revenue | $192.1 million | $181.4 million | $549.7 million | $524.1 million |
| Net income attributable to Starwood Property Trust | $116.7 million | $165.0 million | $354.2 million | $403.5 million |
| Diluted earnings per share | $0.49 | $0.73 | $1.51 | $1.87 |
| Dividends declared per common share | $0.48 | $0.48 | $1.44 | $1.44 |
- Q3 revenue increased about 6%, while attributable net income declined about 29%. For the first nine months, revenue rose about 5% and attributable net income fell about 12%.
- Management-reported non-GAAP Core Earnings were $0.56 per diluted share in Q3, versus $0.55 a year earlier, and $1.64 for the first nine months, versus $1.68. Core Earnings is not GAAP net income or operating cash flow; the company changed its definition during 2015, including to add back certain successful property acquisition costs.
- Q3 interest income from loans was $120.6 million; interest expense was $50.7 million. Nine-month interest income from loans was $357.3 million and interest expense was $151.0 million.
- Cash and cash equivalents were $372.8 million at September 30, up from $255.2 million at December 31, 2014. Restricted cash was $43.6 million.
- For the first nine months, GAAP cash from operations was $259.7 million; cash used in investing was $10.2 million; and cash used in financing was $128.6 million. Cash increased by $120.9 million. Management’s liquidity discussion excludes certain VIE-related cash-flow effects and reports different investing and financing subtotals.
- At quarter-end, loans held for investment, net, were $5.8 billion; loans held for sale were $450.8 million; properties, net, were $530.4 million; and total equity was $4.2 billion.
- Secured financing agreements were $3.68 billion, convertible notes were $1.32 billion net, and secured borrowings on transferred loans were $143.9 million. Separately presented VIE liabilities were $82.18 billion; these obligations are tied to securitization entities and generally have no recourse to the company’s other assets.
Material changes and business developments
- Lending segment revenue rose on portfolio growth: loan investments increased by $647.2 million from September 2014 to September 2015. Q3 lending net interest income increased $8.8 million year over year.
- Interest spreads tightened modestly. Lending’s weighted average unlevered yield was 8.0% in Q3 versus 8.3% in Q3 2014; its levered yield was 10.7% in both periods. Borrowing costs declined, with nine-month weighted average secured borrowing rates of 3.4% versus 3.7%.
- The Property Segment was established following the Ireland Portfolio acquisitions. The portfolio comprises 12 fully occupied net-leased office properties and one multifamily property, with an aggregate purchase price of $226.6 million. It contributed $10.8 million of rental income during the first nine months.
- The company agreed to acquire 29 Florida affordable-housing communities for $524.1 million. Seven properties were acquired after quarter-end for $143.2 million, partly financed with $101.0 million of property-specific debt; the remaining 22 were still subject to closing conditions. A separate 450-unit Tampa acquisition for $29.1 million was also agreed after quarter-end.
- Common stock issuance generated $326.1 million of proceeds during the first nine months. The company repurchased $37.9 million of common stock and $118.6 million principal amount of 2019 convertible notes; the note repurchases generated a $5.9 million GAAP extinguishment loss.
Management outlook, risks and unusual items
- Management stated that it believed available liquidity and access to additional liquidity were sufficient for financial obligations for at least the next 12 months. No earnings or revenue guidance was provided.
- The board declared a fourth-quarter 2015 dividend of $0.48 per share, payable January 15, 2016. Management said future distributions depend on board authorization, cash availability, operating needs and debt service requirements.
- There were $1.7 billion of future funding commitments on 55 loans, of which management expected to fund $1.5 billion. These commitments are generally conditional on specified requirements.
- One $61.0 million mezzanine loan was rated for elevated risk; $18.6 million was more than 90 days past due. The company reported no impairment charge, expecting collection of principal and interest. Loan-loss allowance was $6.3 million.
- One CDO structure was in default and was not consolidated. The company reported maximum potential loss of $222.4 million on VIEs it did not consolidate. It stated it had not provided financial support to its securitization VIEs.
- Reported earnings include significant fair-value and currency effects. Q3 foreign-currency loss was $17.8 million, partly offset by derivative gains; the year-over-year decline in earnings also reflected a smaller increase in net assets of consolidated VIEs. Management cautioned that VIE fair-value movements are affected by consolidation and are not, by themselves, a meaningful measure of segment operating results.
- Key risks identified include borrower defaults, collateral value deterioration, interest-rate and currency movements, refinancing and maturity mismatches, availability and cost of financing, and access to liquidity and capital markets. The company reported compliance with secured-financing covenants at quarter-end and no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the $1.5 billion of expected loan funding commitments and remaining Florida acquisitions are funded and completed as planned.
- Performance, collateral value and recovery prospects for the past-due mezzanine loan, and migration in portfolio credit ratings.
- Liquidity, collateral requirements, covenant headroom and near-term maturities across secured facilities; management noted active discussions to extend or amend facilities.
- How recurring operating earnings compare with GAAP results, including the effects of fair-value changes, VIE consolidation and the company’s revised Core Earnings definition.
- Sustainability of the $0.48 quarterly dividend relative to taxable income, cash generation, funding needs and debt service.