STARWOOD PROPERTY TRUST, INC. quarterly report, Q1 FY2021

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Starwood Property Trust, Inc. — Q1 2021 Form 10-Q

Business context and reporting period

For the three months ended March 31, 2021, Starwood Property Trust (STWD) operated across commercial and residential lending, infrastructure lending, real estate property, and real estate investing and servicing. It is an externally managed REIT focused on originating, acquiring, financing, and managing real estate-related investments. Unless noted, financial amounts below are in U.S. dollars.

Financial and operating performance

  • Revenue and earnings: Revenue was $287.2 million, down 8.1% from $312.6 million in Q1 2020. Net income attributable to STWD was $111.4 million, versus a $66.8 million loss; diluted GAAP EPS was $0.38, versus a $0.24 loss per share.
  • Distributable Earnings (non-GAAP): $150.8 million, or $0.50 per diluted share, versus $162.1 million, or $0.55, in Q1 2020 and $148.4 million, or $0.50, in Q4 2020. The company says this measure is not GAAP earnings, cash flow, liquidity, or taxable income.
  • Significant items in earnings: Q1 included a $17.7 million gain on sale of a foreclosed property, a $34.0 million net gain on derivatives, and $39.7 million of gains from changes in net assets of consolidated securitization VIEs. Foreign currency losses were $11.7 million. The prior-year quarter included a $48.7 million credit loss provision, compared with a $44,000 provision in Q1 2021.
  • Cash flow: Operating activities generated $270.8 million; investing activities used $1.119 billion; financing activities provided $597.2 million. Cash, cash equivalents, and restricted cash totaled $469.9 million at quarter-end, down from $722.2 million at December 31, 2020. Cash dividends paid were $137.7 million.
  • Balance sheet and debt: Total assets were $79.7 billion and total equity was $4.85 billion. Secured financing agreements were $10.90 billion, CLO obligations $0.93 billion, and unsecured senior notes $1.74 billion. Separately reported VIE liabilities were $60.90 billion; the filing states securitization VIE obligations generally have no recourse to STWD. The company reported compliance with debt covenants.
  • Portfolio and credit: Net loans were $13.17 billion. Allowances were $72.3 million for funded loans and $5.4 million for HTM securities; the allowance for unfunded commitments was $3.8 million. A $187.6 million commercial loan and a $14.8 million infrastructure loan in forbearance were placed on nonaccrual; management said it currently expects to recover amounts due on the commercial loan. The filing also identifies $20.2 million of residential loans at least 90 days past due.
  • Margins and yields: Commercial and Residential Lending segment net interest income was $144.7 million, down from $157.1 million in Q1 2020. Its overall weighted-average unlevered yield was 6.1%, versus 6.8% a year earlier; Infrastructure Lending’s was 4.8%, versus 6.1%.

Material changes versus comparable periods

  • Revenue fell year over year, principally from lower loan interest income, including lower prepayment-related income and lower average LIBOR rates. Segment and consolidated results benefited from lower interest expense and substantially lower credit-loss charges than in Q1 2020.
  • GAAP earnings rebounded from the Q1 2020 loss, when COVID-related market disruption contributed to large credit provisions and fair-value losses. Q1 2021 results included positive derivative and consolidated-VIE fair-value effects, as well as the property-sale gain.
  • Net loans held for investment rose to $12.32 billion from $11.09 billion at year-end 2020; loans held for sale declined to $844.6 million from $1.05 billion. Secured financing agreements increased to $10.90 billion from $10.15 billion.
  • STWD declared a quarterly dividend of $0.48 per share, unchanged from the amount shown for the comparable prior-year quarter.

Outlook, commentary, risks, and unusual items

  • Management stated that it believed liquidity and access to additional liquidity were sufficient for obligations for at least the next 12 months; this is not earnings guidance. The filing provides no specific earnings or revenue forecast.
  • COVID-19 remains a source of uncertainty for borrowers, property tenants, asset values, financing availability, liquidity, results, and distributions. Management reported collecting 98% of rents due in Q1, including 98% in its Woodstar affordable-housing portfolios, and collecting 100% of infrastructure-loan interest due. It noted ongoing commercial borrower requests for deferrals or forbearance and continued residential loan loss-mitigation work.
  • Management identified a $700 million senior-note maturity in December 2021, expecting to fund repayment through cash, approved undrawn secured-facility capacity, and/or other financing. The filing also describes projected financing outflows exceeding scheduled principal inflows in certain near-term periods and ongoing discussions with lenders about facilities with near-term expirations.
  • Commercial loan funding commitments expected to be funded were approximately $1.3 billion; infrastructure commitments totaled $192.5 million. Funding is generally subject to specified conditions. Interest-rate increases can affect net investment income: the filing estimates an annual decrease of $28.4 million for a 1 percentage-point increase in rates, after hedging, under its stated sensitivity assumptions.
  • After quarter-end, STWD completed an infrastructure CLO in April 2021 and a commercial-loan CLO in May 2021. The filing reports no material legal proceedings and no material changes to previously disclosed risk factors.

Important facts for investors to verify

  • Underlying loan performance, including the status, collateral, and recoverability of nonaccrual and past-due exposures and the adequacy of credit-loss allowances.
  • Sources and terms for the $700 million December 2021 note maturity and other financing maturities, extensions, and refinancing needs.
  • Cash availability after restricted cash, funding commitments, dividends, and secured borrowing requirements; VIE assets and cash flows are not generally available to meet parent-company obligations.
  • Sustainability of the $0.48 quarterly dividend relative to taxable income, cash generation, and non-GAAP Distributable Earnings; the company cautions that Distributable Earnings is not cash flow or liquidity.
  • Sensitivity of reported earnings and portfolio values to interest rates, foreign exchange, credit spreads, and valuation assumptions, particularly for Level III fair-value assets and liabilities.