Starwood Property Trust, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. The company is an externally managed REIT focused primarily on commercial real estate loans and securities, with growing residential real estate and non-performing loan investments. This unaudited report covers the three months ended March 31, 2013; LNR’s results are not included because its acquisition closed after quarter-end.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior period |
|---|---|---|
| Net interest margin | $66.2 million | $65.9 million |
| Net income attributable to Starwood Property Trust | $62.2 million | $50.2 million |
| GAAP diluted earnings per share | $0.46 | $0.53 |
| Core Earnings, non-GAAP | $58.1 million; $0.43 per diluted share | $55.0 million; $0.58 per diluted share |
| Cash from operating activities | $84.9 million | $174.1 million |
| Cash and cash equivalents at March 31 | $173.1 million | $177.7 million at December 31, 2012 |
| Total assets / total equity at March 31 | $4.61 billion / $2.78 billion | $4.32 billion / $2.80 billion at December 31, 2012 |
Interest income was $83.2 million and interest expense was $17.0 million. Net income benefited from $16.1 million of gains on currency derivatives and $13.9 million of gains on investment sales, partly offset by $7.4 million of unrealized foreign-currency remeasurement losses. The filing does not provide a single operating-margin percentage.
Cash used in investing activities was $281.2 million, chiefly for loan origination and purchases, residential real estate, other investments, and an LNR acquisition deposit. Financing activities provided $191.8 million, including $587.7 million net proceeds from convertible notes, partly offset by secured-debt repayments and dividends.
At quarter-end, secured financing agreements were $1.03 billion, convertible notes were $560.4 million net of discount, and loan-transfer secured borrowings were $87.5 million. Total debt across these categories was approximately $1.68 billion. Secured financing weighted-average cost was 3.8% including hedges; the convertible notes’ effective rate was 6.08%. Secured financings had $530.6 million of scheduled principal repayments for the remainder of 2013, although management expected to extend the Second and Third Wells facilities, subject to conditions. The company reported $758.4 million of aggregate undrawn facility capacity, including $292.1 million approved but undrawn.
Changes versus the prior comparable period
- Net interest margin increased only $0.3 million. Higher portfolio-related interest income was largely offset by higher interest expense; Q1 2012 also included $13.1 million of accelerated amortization.
- Net income rose, but diluted EPS fell to $0.46 from $0.53, reflecting a larger weighted-average share count and lower earnings per share. Core Earnings per diluted share fell from $0.58 to $0.43, principally because Q1 2012 included $12.2 million of net additional income from early repayment of GBP-denominated loans.
- Total expenses increased to $23.1 million from $19.1 million. Q1 2013 included $4.4 million of LNR business-combination costs; higher base management fees and general and administrative costs were partly offset by lower incentive fees.
- Investment activity shifted: loans held for investment declined to $2.53 billion from $2.91 billion, while loans held for sale were $378.7 million and other investments rose to $430.0 million from $222.0 million. The company sold a CMBS position for approximately $206.4 million gross, generating an approximately $11.0 million gain; settlement occurred after quarter-end.
Outlook, risks, contingencies and unusual items
- Management said it believed current liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months. It expected the existing investment portfolio to generate a weighted-average levered return of 11.6%–12.1%; this is a portfolio estimate, not formal earnings guidance.
- On April 19, 2013, the company completed its acquisition of specified LNR businesses for approximately $862 million. Management cited expanded investment opportunities, scale and diversification, and improved underwriting and risk management as expected benefits. Integration, purchase-price allocation, and realization of anticipated benefits remain uncertainties.
- Subsequent to quarter-end, the company issued 30.475 million shares for gross proceeds of $822.4 million, originated additional loans, and entered a $300 million term loan to finance part of the LNR acquisition. These events were not reflected in March 31 balances.
- The board declared a Q2 2013 dividend of $0.46 per share, up from the $0.44 quarterly dividend declared for Q1. The company’s ability to sustain distributions depends on operating cash, debt service, taxable income, and board authorization.
- Key risks include borrower defaults and falling collateral values; interest-rate, prepayment and extension risk; currency movements and imperfect hedges; financing maturities, margin calls and access to liquidity; and valuation uncertainty. Derivative agreements include default provisions and a potential leverage trigger; net derivative liabilities were $11.5 million, with $3.0 million of collateral posted at quarter-end.
- The company had $259.9 million of future funding commitments on 23 loans, generally subject to conditions. It reported no material pending legal proceedings and no material change to previously disclosed risk factors. No individually impaired loans were identified; the loan-loss allowance was $2.1 million.
Important facts for investors to verify
- Whether the expected extensions or refinancing of 2013 secured-financing maturities were obtained, and the resulting funding costs and collateral requirements.
- The final LNR purchase-price allocation, financing, integration costs, and realized contribution to earnings and cash flow.
- How Q1 gains from investment sales and currency derivatives compare with recurring interest income and Core Earnings; Core Earnings is non-GAAP and is not a measure of cash available for dividends.
- The performance, fair-value assumptions and credit concentration of the RMBS portfolio, including its substantial CCC-rated exposure, and of the large hospitality-related debt position.
- Whether loan funding commitments, the larger post-quarter equity base, and the increased dividend can be supported while maintaining liquidity and leverage targets.