Starwood Property Trust, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Starwood Property Trust (STWD) originates, acquires, finances and manages commercial real estate loans, securities and related investments in the U.S. and Europe. Results include the LNR business, acquired in April 2013; the single-family residential (SFR) business was spun off on January 31, 2014.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $172.0 million | $84.0 million |
| Income from continuing operations | $122.4 million | $65.7 million |
| Net income attributable to STWD | $120.6 million; diluted EPS $0.60 | $62.2 million; diluted EPS $0.46 |
| Core Earnings (non-GAAP) | $121.5 million; $0.60 per diluted share | $58.1 million; $0.43 per diluted share |
| Dividends declared per common share | $0.48 | $0.44 |
| Operating cash flow | $104.3 million | $84.9 million |
| Cash and cash equivalents at period end | $226.5 million | $317.6 million at Dec. 31, 2013 |
Revenue growth reflected LNR and a larger lending portfolio; management cited a $1.8 billion year-over-year net increase in Lending Segment loans. Q1 income also included material fair-value and other items, including $56.0 million of net income from consolidated VIEs and a $20.9 million gain from changes in fair value of conduit loans held for sale. GAAP results and margins are therefore affected by the acquisition, VIE consolidation and nonrecurring or valuation-sensitive items.
Q1 investing cash outflow was $402.5 million, including $729 million of loan originations and purchases and $112.0 million distributed in the SFR spin-off. Financing provided $206.9 million, principally from net borrowing; cash declined $91.2 million during the quarter.
At March 31, 2014, net loans held for investment were $4.635 billion. Secured financing agreements were $2.601 billion, convertible notes net carrying amount was $1.001 billion, and secured borrowings on transferred loans were $143.0 million. Consolidated VIE liabilities were $117.9 billion, largely matched by $118.5 billion of VIE assets; these obligations are generally nonrecourse to STWD and the assets are restricted. Total reported assets and liabilities were $125.2 billion and $122.0 billion, respectively, and total equity was $3.216 billion.
Material changes and developments
- The SFR spin-off transferred approximately $1.1 billion of net assets, including about 7,200 single-family homes and residential non-performing loans, to Starwood Waypoint Residential Trust (SWAY). STWD says it has no continuing involvement in SFR.
- LNR contributed servicing, conduit lending and securities activities. Management attributed much of the year-over-year increase in expenses to LNR and higher borrowing and management costs.
- STWD originated several large commercial real estate financings and $261.8 million of conduit loans; it sold $302.5 million of conduit loans during the quarter.
- A repurchase facility was amended: capacity increased from $550 million to $1.0 billion, maturities were extended, pricing and certain thresholds reduced, and extension options added. STWD reported compliance with financing covenants at quarter end.
- On April 11, 2014, STWD issued 22.0 million shares for $491.0 million gross proceeds; underwriters exercised an option for 3.3 million additional shares, generating another $73.7 million gross. The board declared a Q2 dividend of $0.48 per share.
Liquidity, outlook and risks
Management said it believed current liquidity and access to additional liquidity were sufficient for financial obligations for at least the next 12 months. At March 31, secured facilities had approximately $1.0 million of approved but undrawn capacity and $727.2 million of unallocated facility amount; availability is subject to lender approval and terms. The subsequent equity offering added gross proceeds of $564.7 million.
STWD reported $1.8 billion of future loan-funding commitments across 43 loans, generally conditional on customary draw requirements; approximately $900.3 million was scheduled within one year. It intends to continue quarterly dividends, but distributions depend on board authorization, cash availability, operating needs and debt-service requirements. No specific earnings or investment guidance was provided.
Credit exposure includes $57.8 million of loans in default at quarter end. Most related to a single Lending Segment mezzanine loan in technical default following a senior-loan covenant breach; refinancing was in process and management expected no lender concessions. STWD recorded a $4.5 million loan-loss allowance and said no individual held-for-investment loan impairment charge was required. One CDO structure was in default and was not consolidated. Other key risks include borrower defaults, collateral-value declines, interest-rate and foreign-exchange movements, funding costs and availability, refinancing or maturity mismatches, and the ability to originate acceptable investments. Management noted that foreign-exchange hedges may not fully offset exposures and can require collateral.
Core Earnings is a company-defined non-GAAP measure, not cash flow or a measure of liquidity; its calculation includes management-approved adjustments and may not be comparable with similarly named measures at other REITs. The filing reported no material change in previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls.
Most important facts for investors to verify
- How much of reported earnings and Core Earnings is recurring, particularly the contribution from LNR, VIE accounting and fair-value changes.
- The credit quality, collateral performance and repayment or refinancing status of the defaulted mezzanine loan and the broader loan portfolio.
- Actual availability and terms of secured funding, near-term facility maturities, and the capacity to meet $1.8 billion of conditional loan commitments.
- The impact of the SFR spin-off and subsequent share issuance on per-share earnings, equity and future dividend coverage.
- Whether cash generation and taxable income support the $0.48 quarterly dividend after funding investment needs and servicing debt.