STARWOOD PROPERTY TRUST, INC. annual report, FY2021

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Starwood Property Trust, Inc. — 2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter earnings release. Starwood Property Trust is an externally managed REIT investing in commercial and residential real estate debt, infrastructure loans, property equity, and real estate servicing and securities.

Financial performance and condition

  • Revenue: $1.170 billion, up 3.0% from $1.136 billion in 2020.
  • Profit: Net income attributable to Starwood Property Trust was $447.7 million, versus $331.7 million; diluted GAAP EPS was $1.52, versus $1.16.
  • Distributable Earnings (non-GAAP): $794.1 million, or $2.63 per diluted share, compared with $585.3 million, or $1.98, in 2020. The 2021 figure includes a $191.3 million Distributable Earnings gain related to selling a 20.6% interest in the Woodstar Fund; it is not a recurring operating result.
  • Cash flow and liquidity: GAAP operating cash flow was negative $990.0 million; investing cash flow was negative $4.282 billion and financing cash flow was positive $4.873 billion. Year-end cash and cash equivalents were $217.4 million, plus $104.6 million of restricted cash. Management said available liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months.
  • Assets and debt: Total assets were $83.850 billion and permanent equity was $6.434 billion. Secured financing, CLO/SASB obligations, and unsecured notes totaled approximately $17.0 billion at carrying value. Separately reported securitization VIE liabilities were $59.753 billion and are generally non-recourse to the Company; VIE assets were $61.281 billion.
  • Portfolio and credit: Net loans were $18.414 billion, up from $12.140 billion in 2020. The allowance for credit losses on funded loans was $67.3 million; including unfunded commitments and HTM securities, the reported allowance was $82.7 million. Loans at least 90 days past due totaled $456.5 million; management said it expected full recovery on those loans. A separate $39.3 million of loans was deemed credit-deteriorated and on nonaccrual, including a $10.1 million specific reserve on an infrastructure loan.
  • Dividends: The Company declared $1.92 per common share during 2021, or $0.48 quarterly. The board retains discretion over future distributions.

Material changes versus 2020

  • Revenue increased modestly, while GAAP net income rose by $116.1 million. The improvement included stronger fair-value and derivative results and recovery from 2020 market disruption; results include material non-cash and transaction-related effects.
  • Commercial and residential lending revenue rose, but segment net interest income was nearly flat as higher loan income was offset by higher financing costs. Its 2021 credit-loss provision was a reversal, compared with a substantial provision in 2020.
  • Infrastructure lending revenue increased, but credit-loss expense rose, including the specific fourth-quarter reserve noted above.
  • Investing and servicing results improved, with higher servicing fees and favorable changes in CMBS fair values. Servicing fees benefited from increased COVID-related loan resolutions.
  • On November 5, 2021, the Company established the Woodstar Fund for its 59 affordable-housing properties and sold a 20.6% interest to institutional investors for $214.2 million net proceeds. The transaction changed the accounting presentation of the properties and generated the substantial Distributable Earnings gain noted above.
  • Commercial lending originations or acquisitions totaled $10.0 billion for the year; residential loan acquisitions totaled $4.5 billion. The Company issued two CLOs and a single-asset securitization during 2021 and issued $800 million of senior notes, while repaying the remaining $300 million of 5.00% notes due in 2021. It also issued 16.0 million common shares for $393.1 million.

Outlook, risks and unusual items

  • Management’s stated objective is long-term risk-adjusted returns, primarily through dividends and secondarily through capital appreciation. The filing provides no numerical earnings or dividend guidance.
  • Key risks include borrower defaults and collateral-value declines; COVID-19 effects on borrowers, tenants and property markets; significant leverage, refinancing and margin-call exposure; interest-rate and funding-cost movements; and potential asset-liability mismatches.
  • Management highlighted the transition away from LIBOR and possible mismatches or higher costs as contracts move to alternatives such as SOFR and SONIA. Its sensitivity analysis estimated that a 1 percentage-point increase in relevant rates would reduce annual net investment income by about $11.9 million after hedging.
  • Portfolio and valuation risks include illiquid investments, Level III fair-value estimates, property-type and geographic concentrations, and infrastructure exposure concentrated in power and oil and gas. The auditor identified Level III residential and commercial MBS valuation as a critical audit matter.
  • The Company is externally managed by an affiliate of Starwood Capital Group. The filing describes related-party, allocation and other conflicts, as well as base and incentive management fees. It reported $70.3 million of incentive fees for 2021.
  • Subsequent to year-end, the Company issued $500 million of 4.375% notes due 2027 and completed two additional CLO refinancings. These events occurred after the reporting date.
  • Deloitte issued an unqualified opinion on the financial statements and internal controls; management also reported effective internal control over financial reporting. No material legal proceedings were reported.

Important facts for investors to verify

  • Reconcile GAAP earnings, cash generation and the non-GAAP Distributable Earnings measure, especially the Woodstar-related gain and the manager incentive fee.
  • Review the $456.5 million of seriously past-due loans, the $39.3 million of credit-deteriorated loans, nonaccrual status, collateral values and subsequent resolutions.
  • Assess refinancing needs and available funding against debt maturities, loan commitments, margin-call terms and the Company’s reliance on secured financing and securitizations.
  • Check the sensitivity of asset yields, funding costs and hedges to rising rates and the LIBOR transition, including the timing and terms of benchmark-rate conversions.
  • Evaluate the valuation assumptions for Level III assets, the effects of Woodstar’s fair-value accounting, portfolio concentrations, and the sustainability of the quarterly dividend.