Starwood Property Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Starwood Property Trust is an externally managed REIT investing in commercial and residential real estate loans and securities, infrastructure debt, property, and real estate servicing and investments.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $267.4 million | $288.3 million | $845.6 million | $910.0 million |
| Net income attributable to STWD | $151.8 million | $140.4 million | $224.7 million | $337.8 million |
| Diluted EPS | $0.52 | $0.49 | $0.79 | $1.19 |
| Core Earnings per diluted share (non-GAAP) | $0.50 | $0.52 | $1.48 | $1.33 |
- Q3 revenue declined about 7% year over year, while net income attributable to STWD rose about 8%. For the first nine months, revenue declined about 7% and attributable net income fell about 33%.
- Q3 Core Earnings per diluted share decreased from $0.52 to $0.50; nine-month Core Earnings per diluted share increased from $1.33 to $1.48. Core Earnings is a company-defined non-GAAP measure and is not a substitute for GAAP income or cash flow.
- Q3 results included a $61.4 million gain from changes in fair value of mortgage loans, offset in part by a $28.1 million net loss on derivatives. For the nine months, the company recorded a $55.3 million net credit-loss provision, compared with $3.2 million in the prior-year period.
- At September 30, net loans were $11.9 billion, including $10.9 billion held for investment and $1.0 billion held for sale. The loan allowance was $109.7 million; the reported allowance including unfunded commitments was $122.9 million.
- Cash and cash equivalents were $379.9 million and restricted cash was $131.3 million. Nine-month GAAP operating cash flow was $526.1 million, versus cash used of $569.8 million in 2019; investing activities used $570.0 million and financing activities used $19.9 million. Cash, cash equivalents and restricted cash decreased $63.7 million to $511.2 million.
- At quarter end, balance-sheet debt included $9.6 billion of secured financing, $929.9 million of CLO liabilities and $1.9 billion of unsecured senior notes, net. Separately reported VIE liabilities were $62.9 billion; the filing states these obligations are generally non-recourse and supported by restricted VIE assets.
- Total assets were $80.6 billion and total equity was $4.9 billion. Gross consolidated totals include securitization VIEs and should not be read as wholly available to or obligations of STWD.
Changes, management commentary and outlook
- Q3 commercial and residential lending revenue increased, and lower funding costs supported higher net interest income. Lower LIBOR reduced yields in infrastructure lending. Property and investing-and-servicing revenue declined, including from the prior sale of the Ireland portfolio and fewer properties held.
- Investing-and-servicing results were affected by lower servicing fees, CMBS and conduit-loan income, and fewer owned properties. COVID-19-related disruption and credit-spread changes contributed to fair-value volatility.
- During Q3, STWD completed 12 payment-related loan modifications totaling $1.3 billion in principal, including $10.6 million of interest deferrals. It collected 96% of rents due and 100% of infrastructure-loan interest due during the quarter.
- Management said it believes liquidity and access to additional liquidity are sufficient for obligations over at least the next 12 months, while emphasizing substantial pandemic-related uncertainty. It expects loan repayments to slow while COVID-19 impacts persist and said it may raise capital, borrow, sell assets, pay management fees in stock, or reduce, suspend, or pay future dividends in kind. No numerical earnings guidance is provided.
- The quarterly dividend declared was $0.48 per share. The company repurchased 1.9 million shares for $28.8 million during the first nine months under a $400 million authorization.
- STWD reported compliance with secured-financing and unsecured-note covenants at September 30. It extended seven facilities during Q3, with aggregate maximum capacity of $5.1 billion. Subsequent to quarter end, it redeemed $250 million of the $500 million senior notes due February 2021 on November 2, with the remaining $250 million scheduled for redemption November 18; it also issued $300 million of 5.50% notes due 2023.
- Five CDO structures were in default or imminent default at quarter end; none were consolidated. Management reported no other contractual obligations or legal proceedings expected to have a material adverse effect.
Risks and unusual items
- COVID-19 may impair borrowers’ ability to pay, reduce collateral and property values, disrupt tenants and projects, and increase defaults, loan modifications, foreclosures, credit losses, or rent deferrals. Hospitality, retail, multifamily and office exposures are among the areas discussed.
- Market-value declines may trigger margin calls under financing facilities; failure to meet them could allow lenders to demand repayment or take collateral. Management noted that most repurchase facilities limit margin calls to collateral-specific credit marks, but some permit broader market-related calls.
- At September 30, $142.3 million of credit-deteriorated commercial loans were on nonaccrual. The filing also reports a $173.3 million commercial loan and $13.4 million of residential loans at least 90 days past due.
- CECL adoption on January 1, 2020 increased the opening allowance by $32.3 million. The company’s credit-loss estimates depend on economic forecasts and other assumptions that management says are less certain during the pandemic.
- Interest-rate exposure, foreign-currency movements, LIBOR transition, funding availability and refinancing needs remain risks. The filing identifies $500 million of senior notes due in February 2021 and planned alternative financing for certain FHLB borrowings.
- Fair-value estimates rely in part on unobservable inputs, and changes in assumptions could materially affect reported results. Q3 included volatile foreign-exchange and derivative gains and losses.
Key facts for investors to verify
- How loan modifications, nonaccrual loans and past-due balances have evolved, and whether collateral values support expected principal recovery.
- Liquidity available after funding commitments, near-term maturities and any margin calls; confirm completion and terms of the post-quarter debt redemptions and issuance.
- Whether rent collections, borrower payments and property operations remain resilient as pandemic conditions change.
- How GAAP results reconcile to Core Earnings, particularly the treatment of credit provisions, fair-value movements and securitization activity.
- Whether the $0.48 quarterly dividend remains supported by taxable income, liquidity and financing requirements.