Starwood Property Trust, Inc. — 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. Starwood Property Trust is an externally managed REIT focused principally on commercial real estate debt and mortgage-backed securities.
Financial performance and position
- Second-quarter results: Net interest margin was $41.1 million, up from $18.0 million in Q2 2010. Net income attributable to Starwood was $32.4 million versus $10.8 million; diluted EPS was $0.39 versus $0.22. Distributions declared were $0.44 per share versus $0.25.
- First-half results: Net interest margin was $73.3 million versus $30.4 million; net income attributable to Starwood was $63.9 million versus $16.8 million. Diluted EPS was $0.82 versus $0.35. Core Earnings, a company-defined non-GAAP measure, were $67.5 million, or $0.86 per diluted share, versus $20.0 million, or $0.41.
- Revenue and expenses: First-half interest income from loans was $73.8 million and from mortgage-backed securities was $14.0 million; interest expense was $14.4 million. Total expenses were $24.5 million versus $13.2 million in the prior-year period.
- Cash flow: First-half operating cash flow was negative $92.1 million, investing cash flow negative $564.3 million, and financing cash flow positive $526.3 million. Cash decreased $130.1 million to $96.7 million. Operating cash use included funding held-for-sale loan originations.
- Balance sheet at June 30: Total assets were $2.649 billion, total liabilities $848.5 million, and total equity $1.800 billion. Loans held for investment were $1.839 billion; loans held for sale were $296.7 million; available-for-sale MBS were $282.8 million.
- Debt and liquidity: Secured financing agreements totaled $697.7 million, with a further $53.6 million securitization-trust liability. Management reported $463.6 million of undrawn facility capacity and believed liquidity and access to additional liquidity were sufficient for at least 12 months. It expected $126.4 million of scheduled loan maturities before year-end, mostly in Q3.
Changes versus comparable periods
- Growth in investment activity drove higher interest income and net interest margin. Loans increased by about $1.3 billion year over year; secured financing balances increased by $248.1 million.
- The company originated or acquired $1.266 billion of investments in the first half, including held-for-sale loans, and completed a $476.7 million common-stock offering in May.
- First-half realized gains on investment sales were $15.9 million. These included gains on MBS and loan sales; fair-value gains on held-for-sale loans were $9.0 million.
- Expenses rose, reflecting higher management and incentive fees, stock compensation, and general and administrative costs. First-half results also included $1.7 million of other-than-temporary impairment charges on RMBS and realized and unrealized derivative losses.
Outlook, risks, and unusual items
- No full-year earnings or investment guidance was provided. The board declared a $0.44-per-share dividend for Q3 2011, payable October 14 to holders of record September 30.
- Management reported that mid-July deterioration in the CMBS securitization market—including wider new-issue credit spreads and declining secondary prices—was estimated to have reduced held-for-sale loan fair value by approximately $7 million through July 31.
- Repurchase financing exposes the company to collateral valuation changes, margin calls, refinancing and maturity risk. Contractual obligations totaled $862.1 million, including $469.7 million due in less than one year; this includes loan funding commitments and securitization liabilities.
- Interest-rate, credit-spread, foreign-exchange, prepayment, extension, property-value, and liquidity risks could affect earnings and asset values. Derivative agreements include default triggers, including a debt-to-total-assets threshold above 75%; the net derivative liability was $22.5 million and $6.2 million of collateral had been posted.
- One unrated CMBS position had a fair value of $185.7 million. The company reported no loan-loss allowance and no loans in its highest-risk rating category, but 110.4 million of loans were internally rated category 4.
- The company paid $27.2 million in Q2 under contingent IPO underwriting-fee arrangements after exceeding the specified Core Earnings threshold. No material legal proceedings were reported.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether the estimated $7 million post-quarter held-for-sale loan valuation decline was realized or changed after July 31.
- The availability and terms of financing facilities, collateral marks, margin-call exposure, and near-term maturities.
- Credit quality and valuation assumptions for the large unrated CMBS position, RMBS impairments, and category 4 loans.
- Whether loan maturity proceeds, loan funding commitments, and securitization activity support management’s 12-month liquidity assessment.
- How much reported earnings and Core Earnings depend on realized gains, fair-value changes, leverage, and non-cash compensation; Core Earnings is not a GAAP cash-flow or liquidity measure.