Starwood Property Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Starwood Property Trust is an externally managed REIT focused on real estate lending and investments, infrastructure lending, property ownership, and real estate investing and servicing. Results include large securitization VIE balances; those assets are restricted and related liabilities generally have no recourse to the company.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $521.5 million | $390.5 million | $1.528 billion | $1.010 billion |
| Net income attributable to STWD | $47.4 million | $194.6 million | $268.3 million | $731.4 million |
| Diluted GAAP EPS | $0.15 | $0.61 | $0.85 | $2.30 |
| Distributable Earnings per diluted share (non-GAAP) | $0.49 | $0.51 | $1.47 | $1.78 |
| Net cash provided by operating activities | — | $516.7 million | $844.7 million |
- Q3 interest income from loans rose to $457.3 million from $328.4 million, while interest expense increased to $368.4 million from $222.4 million. The Q3 credit loss provision was $52.6 million, versus $15.3 million a year earlier.
- For the first nine months, interest expense more than doubled to $1.067 billion from $501.5 million. Net credit loss provision rose to $217.8 million from $20.1 million.
- At September 30, total assets were $70.3 billion and equity was $6.7 billion. Cash and cash equivalents were $195.3 million; restricted cash was $236.0 million. Loans held-for-investment, net, were $17.2 billion and loans held-for-sale were $2.6 billion.
- Debt carrying amounts included $13.6 billion of secured financing, $3.5 billion of CLO/SASB financing, and $2.5 billion of unsecured senior notes. The company issued $380.8 million of 6.75% convertible notes due 2027 in July and repaid $250 million of convertible notes in April.
- Cash, cash equivalents and restricted cash ended the nine-month period at $431.3 million, up from $382.1 million at the start. Investing activities provided $943.2 million and financing activities used $1.411 billion. Cash interest paid was $1.017 billion.
- The quarterly dividend was $0.48 per share. The board declared three quarterly dividends of that amount during the first nine months of 2023.
Material changes versus comparable periods
- Revenue increased year over year, largely reflecting higher interest income as rates and loan balances rose. However, GAAP net income and EPS fell sharply, and nine-month Distributable Earnings per share declined to $1.47 from $1.78.
- Higher benchmark rates increased funding costs: commercial and residential lending segment nine-month net interest income rose to $544.8 million from $484.3 million, while its average secured borrowing rate increased to 7.1% from 3.3%. Its reported overall unlevered yield rose to 8.6% from 5.7%.
- Lower unrealized fair-value gains in the Woodstar affordable housing fund were a major year-over-year earnings headwind: fund investment income was $253.7 million for nine months, down from $658.7 million. Derivative gains also declined materially.
- The allowance for credit losses on held-for-investment loans increased to $271.3 million from $99.4 million at year-end 2022. Commercial loan and infrastructure credit provisions, alongside higher funding expense, weighed on GAAP earnings.
- Total assets declined from $79.0 billion at year-end 2022 to $70.3 billion, with VIE assets falling to $44.7 billion from $52.5 billion. Net loans declined from $21.2 billion to $19.8 billion.
Outlook, risks and unusual items
- Management said it believes current liquidity and access to additional liquidity are sufficient to meet financial obligations for at least the next 12 months. It also reported compliance with secured financing and unsecured note covenants.
- Management cited inflation, rising interest rates, slower growth, geopolitical uncertainty, and reduced market liquidity and credit availability. Higher rates may support income, but may also impair borrower performance and collateral cash flows; office and retail properties face particular pressure.
- Based on scheduled investment repayments and financing requirements, projected financing outflows exceeded scheduled inflows by about $1.187 billion through Q3 2024. Management said part of the shortfall relates to rolling-term facilities it has historically extended and intends to extend, subject to lender consent; it is discussing extensions, amendments, or replacements for near-term maturities.
- At September 30, $229.9 million of loans were at least 90 days past due and on nonaccrual, including a Washington, D.C. office loan and a California resort loan secured by a property destroyed by wildfire. Additional nonaccrual loans included a $220.1 million New Jersey retail and entertainment loan and a $60.8 million Portland multifamily loan.
- A $23.8 million impairment was recorded on a vacant California building acquired through foreclosure. The company also reported a 19-month extension of a $197.2 million office-park loan and a $25.1 million preferred-equity commitment, of which $19.6 million remained unfunded.
- After quarter-end, the company received $52.3 million of distributions related to the New Jersey retail and entertainment investment, reducing the carrying value of the loan and related equity interest. It repaid $300 million of 2023 senior notes at maturity on November 1, 2023.
- There were no material changes to the risk factors disclosed in the 2022 Form 10-K, and the filing reported no material pending or threatened legal proceedings.
Important facts for investors to verify
- Track nonaccrual loans, borrower workouts, collateral valuations, and whether credit loss allowances adequately reflect property-specific office and retail risks.
- Check lender consent and refinancing progress for rolling-term facilities and near-term maturities, including the projected financing shortfall through Q3 2024.
- Assess whether asset yields continue to exceed rising funding costs, and review the effect of interest-rate and foreign-exchange hedges.
- Separate recurring cash and credit performance from volatile fair-value changes, particularly Woodstar fund valuations, derivatives, and fair-valued loans.
- Compare the $0.48 quarterly dividend with Distributable Earnings and available cash; Distributable Earnings is a non-GAAP measure and is not cash flow or a measure of liquidity.