Starwood Property Trust, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. The company is an externally managed REIT investing in commercial and residential real estate debt, infrastructure debt, real estate property, and real estate investing and servicing businesses.
Financial performance and position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1.196 billion | $1.109 billion | +7.9% |
| Net income attributable to Starwood Property Trust | $509.7 million | $385.8 million | +32.1% |
| Diluted GAAP EPS | $1.79 | $1.42 | +26.1% |
| Core Earnings, non-GAAP | $528.9 million; $1.80 per diluted share | $608.1 million; $2.19 per diluted share | Down 13.0% in total |
| Dividends declared per common share | $1.92 | $1.92 | Unchanged |
Fourth-quarter 2019 revenue was $286.4 million, net income attributable to the company was $171.9 million, diluted EPS was $0.60, and Core Earnings per diluted share was $0.47.
- Year-end net loans were $11.47 billion, versus $9.79 billion a year earlier; net property investments were $2.27 billion, versus $2.78 billion.
- Cash and cash equivalents were $478.4 million and restricted cash was $95.6 million at year-end. GAAP operating cash flow was negative $13.2 million; investing cash flow was negative $775.9 million and financing cash flow was positive $876.7 million.
- Financing liabilities included $8.91 billion of secured financing agreements, $928.1 million of CLO liabilities, and $1.93 billion of unsecured senior notes, net. Management reported a 68.0% debt-to-assets ratio and said liquidity was sufficient for obligations for at least 12 months.
- GAAP total assets of $78.0 billion and liabilities of $72.9 billion include consolidated securitization VIE assets of $62.2 billion and VIE liabilities of $60.7 billion. These gross VIE balances are restricted and generally non-recourse to the company.
Material changes and unusual items
- Commercial and residential lending revenue increased $65.1 million, but net interest income rose only $3.6 million as higher secured-funding costs offset much of the increase in interest income. The segment’s overall unlevered yield fell to 7.3% from 7.7%.
- Investing and servicing revenue declined $50.6 million, largely from lower servicing fees; other income increased, including changes in fair values and gains from property sales.
- The infrastructure lending segment was acquired in September and October 2018, so 2019 results include a full year while 2018 includes only the post-acquisition period.
- The company sold its Ireland Portfolio in December 2019, recognizing a $119.7 million GAAP gain after selling costs. It also recognized a $71.9 million impairment against its remaining Retail Fund investment after the fund’s secured financing matured unpaid. Core Earnings included a $139.5 million loss related to the Retail Fund investment.
- In August 2019, the company completed a $1.1 billion commercial loan CLO; third-party investors purchased $936.4 million of notes and the company retained notes and preferred interests. It also originated or acquired $5.5 billion of commercial loans and $1.0 billion of infrastructure loans and bonds during the year.
- Interest expense increased to $508.7 million from $408.2 million. Loan-loss provision was $7.1 million, down from $34.8 million in 2018; the year-end allowance for loan losses was $33.6 million.
Outlook, risks and contingencies
- Management’s stated objective is long-term risk-adjusted returns primarily through dividends, with continued lending, securitization, property, residential mortgage, and infrastructure investment activity. The filing provides no numerical earnings or revenue guidance.
- The board declared a first-quarter 2020 dividend of $0.48 per share, payable April 15, 2020. The company has not established a minimum distribution and future dividends remain subject to board discretion, earnings, liquidity, and debt covenants.
- Material risks include borrower defaults and declining collateral values; high leverage, refinancing and maturity mismatches; margin calls and funding-market access; interest-rate and foreign-currency exposure; illiquid and Level III-valued investments; and risks from construction and energy-project lending.
- Management highlighted the anticipated LIBOR phaseout after 2021 and uncertainty around replacement benchmarks. A financing subsidiary’s FHLB membership was expected to end in February 2021, potentially affecting access to that funding source.
- Commercial and residential loan funding commitments expected to be funded totaled approximately $2.9 billion; infrastructure commitments totaled $360.6 million. The company reported compliance with secured-financing covenants at year-end. No material legal proceedings were pending, and the auditor issued unqualified opinions on the financial statements and internal controls.
- Auditors identified valuation of Level 3 residential and commercial mortgage-backed securities as a critical audit matter, reflecting significant judgment in pricing investments without readily observable market inputs.
Important facts for investors to verify
- How recurring earnings and cash generation compare with the $1.92 annual dividend, particularly given Core Earnings of $1.80 per diluted share and negative GAAP operating cash flow.
- The quality, performance, and collateral coverage of loan exposures, including past-due or non-accrual loans, construction loans, and the energy-concentrated infrastructure portfolio.
- Debt maturities, refinancing plans, available borrowing capacity, covenant headroom, and the ability to meet unfunded commitments without asset sales or costly new financing.
- The assumptions underlying Level 3 fair values and the Retail Fund impairment, as well as the sustainability of gains from asset sales and other nonrecurring or valuation-sensitive items.
- The effect of benchmark-rate transition, foreign exchange movements, and the FHLB membership expiration on funding costs, asset-liability matching, and liquidity.