Starwood Property Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company is a REIT focused on commercial and residential real estate lending, infrastructure lending, property ownership, and real estate investing and servicing. Comparisons are affected by the infrastructure lending business acquired in September 2018 and by consolidation of securitization VIEs.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $288.3 million | $285.7 million | $910.0 million | $815.9 million |
| Net income attributable to STWD | $140.4 million | $84.5 million | $337.8 million | $293.7 million |
| Diluted EPS | $0.49 | $0.31 | $1.19 | $1.09 |
| Core Earnings per diluted share (non-GAAP) | $0.52 | $0.53 | $1.33 | $1.66 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $(569.8) million | $174.6 million |
- Q3 revenue was nearly flat year over year, while attributable net income rose substantially. Quarterly results included gains from mortgage-loan fair value changes and property sales; these are not solely recurring lending earnings.
- Nine-month revenue and GAAP earnings increased, but Core Earnings declined. Management attributed the Core Earnings decrease primarily to a $68.9 million loss related to the Retail Fund investment, reflecting property fair value declines.
- Q3 commercial and residential lending net interest income fell to $111.6 million from $114.9 million, as higher financing expense outweighed higher investment-security income. The filing does not provide one consolidated operating-margin measure that is directly comparable across the company’s businesses.
- Operating cash use reflected loan origination and purchase activity, including loans held for sale. Investing activities provided $398.1 million and financing activities provided $81.1 million on a GAAP basis for the nine months.
Balance sheet, debt and liquidity
- At September 30, 2019, total assets were $74.4 billion and total equity was $4.9 billion. Assets and liabilities included $59.2 billion and $58.0 billion, respectively, related to consolidated VIEs; those obligations generally are nonrecourse and the VIE assets are restricted.
- Cash and cash equivalents were $284.1 million; restricted cash was $110.5 million. Combined, these were $394.7 million, down from $487.9 million at December 31, 2018.
- Loans held for investment and held for sale totaled $10.4 billion gross, with a $33.0 million loan-loss allowance. Management reported $29.9 million of impaired-loan allowances, including $21.6 million on a New York residential conversion project. Certain department-store, residential, and infrastructure loans were 90 days or more past due and on non-accrual.
- Reported debt included $8.25 billion of secured financing agreements, $927.4 million of CLO liabilities, and $1.93 billion of unsecured senior notes. The filing states that secured-financing covenants were met. These balances exclude the separately presented nonrecourse VIE liabilities.
- Management said it believed liquidity and access to additional liquidity were sufficient to meet obligations for at least the next 12 months. The company had substantial contractual funding commitments, including $2.48 billion of loan commitments and $189.8 million of infrastructure commitments.
Material changes, outlook and risks
- The company completed a $1.1 billion commercial-loan CLO in August, retaining $86.6 million of notes and preferred shares with a $77.0 million liquidation preference. CLO debt is nonrecourse, but the retained subordinate interests bear greater exposure to loan losses and distribution shortfalls.
- The quarterly common dividend was $0.48 per share, or $1.44 declared per share for the first nine months. A further $0.48 dividend was declared for Q4, payable January 15, 2020. Future distributions remain subject to board authorization, available cash, operating needs, and debt service.
- No quantified earnings or revenue guidance is provided in the supplied filing text. Management cited borrower defaults, collateral impairment, interest-rate and foreign-exchange changes, funding availability and cost, and asset-repayment versus financing-maturity mismatches as key risks. It also cautioned that actual results may differ materially from forward-looking statements.
- Four CDO structures in the investing and servicing business were in default or imminent default at quarter-end; none were consolidated. Separately, after quarter-end the Retail Fund’s secured financing reached maturity, and STWD said it believed the fund could not repay, potentially constituting a default.
- Other subsequent events included a $500 million infrastructure lending facility, a $600 million medical-office refinancing, and an October securitization of $370.3 million of residential loans.
- Management expected the upcoming expected-credit-loss accounting standard to result in higher loan-loss allowances, but had not completed its estimate of the impact.
Important facts for investors to verify
- How much of reported earnings and Core Earnings depends on fair value marks, derivative results, property-sale gains, and other nonrecurring items.
- The status, collateral performance, and potential recovery of impaired and non-accrual loans, including the New York conversion project and department-store loans.
- Whether the Retail Fund can refinance or repay its matured financing, and the potential effect on STWD’s investment.
- Liquidity available after committed loan fundings, near-term financing maturities, margin requirements, and dividend payments; distinguish corporate liquidity from restricted or nonrecourse VIE resources.
- The performance and cash distributions of the new CLO and the risks of retained subordinate interests, as well as the company’s exposure to floating rates and foreign currencies.