Starwood Property Trust, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Starwood Property Trust originates, acquires, finances and manages real estate and infrastructure debt and property investments across four segments. Unless otherwise noted, amounts are in U.S. dollars. Consolidated results include large securitization VIE balances; those assets are restricted to settling VIE obligations, which are non-recourse to the company.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $515.7 million | $325.6 million | $1,006.1 million | $619.6 million |
| Interest expense | $363.3 million | $152.6 million | $698.6 million | $279.1 million |
| Net credit loss provision | $121.9 million | $8.4 million | $165.1 million | $4.8 million |
| Net income | $222.4 million | $281.7 million | $282.1 million | $666.0 million |
| Net income attributable to STWD | $168.8 million | $212.3 million | $220.8 million | $536.9 million |
| Diluted EPS | $0.54 | $0.67 | $0.70 | $1.69 |
- Q2 revenue growth was led by higher loan interest income, but earnings attributable to STWD declined year over year as interest expense and credit provisions rose. Q2 GAAP results also included $223.8 million of affordable-housing fund income, primarily unrealized fair-value appreciation, versus $307.2 million in Q2 2022.
- Management’s non-GAAP Distributable Earnings were $157.5 million, or $0.49 per diluted share, in Q2, versus $0.49 in Q1 2023 and $0.51 in Q2 2022. First-half Distributable Earnings were $314.8 million, or $0.98 per share, versus $402.5 million, or $1.27, a year earlier. The measure excludes, among other items, unrealized gains and losses and CECL reserves; it is not GAAP income or cash flow.
- Commercial and residential lending segment net interest income was $177.5 million in Q2, down $4.2 million from Q1: higher asset yields were more than offset by borrowing costs. Its average secured borrowing rate was 7.2% in Q2, with hedges reducing it to 6.6%.
Financial position, cash flow and capital
- At June 30, total assets were $73.2 billion and total liabilities were $66.0 billion, compared with $79.0 billion and $71.8 billion at year-end 2022. Cash and cash equivalents were $333.9 million; restricted cash was $120.3 million.
- Net loans were $20.5 billion, down from $21.2 billion at year-end. Funded-loan credit loss allowances rose to $236.8 million from $99.4 million; the allowance on unfunded commitments was $15.5 million.
- Six-month operating cash flow was $160.4 million; investing cash flow was positive $552.1 million and financing cash flow was negative $640.5 million. Cash, cash equivalents and restricted cash increased $71.9 million to $454.2 million. The company paid $300.0 million of dividends in the period.
- Debt carrying values included $14.5 billion of secured financing agreements, $3.66 billion of CLO/SASB financing and $2.08 billion of unsecured senior notes. The $250 million 4.375% convertible notes due 2023 were repaid in cash on April 1.
- The board declared quarterly dividends of $0.48 per share in both Q1 and Q2. Management said it believed current liquidity and access to additional liquidity were sufficient for financial obligations over at least the next 12 months. The company reported compliance with secured-debt and unsecured-note covenants at quarter-end.
Material changes and notable items
- Year-over-year first-half revenue rose $386.5 million, principally from higher loan interest income reflecting higher index rates and loan balances. The increase was substantially offset by higher interest expense and credit loss provisions.
- First-half GAAP income included $236.8 million of affordable-housing fund investment income, primarily unrealized fair-value gains, down from $541.2 million in the prior-year period. The year-ago period also included an $86.6 million gain on sale of a foreclosed property.
- The company recorded a $23.8 million impairment on a vacant California building acquired through foreclosure. It also obtained a deed in lieu of foreclosure on a Chicago hotel retail property, reclassifying a $41.1 million loan into property and lease intangible assets.
- At quarter-end, $376.7 million of loans were 90 days or more past due; almost all were on nonaccrual. The filing also identifies a $218.0 million New Jersey retail and entertainment loan on nonaccrual that was not 90 days past due. Specific second-quarter provisions included $14.7 million on an Arizona office/retail loan, charged off in the quarter, and $4.4 million on an infrastructure loan already in bankruptcy.
- After quarter-end, in July 2023, STWD issued $380.8 million of 6.750% convertible senior notes due 2027, receiving $371.2 million net proceeds. The filing reports an initial conversion price of approximately $20.76 per share, subject to the stated conversion terms.
Liquidity, outlook and risks
- No specific earnings or portfolio guidance is provided. Management described market conditions as volatile, citing inflation, higher interest rates, slowing growth, geopolitical uncertainty, and reduced liquidity and credit availability following stress among financial institutions.
- Management noted that rising rates can increase income, all else equal, but can also strain borrowers and collateral cash flows. The filing highlights refinancing and funding risk: projected financing repayments exceed scheduled/projected principal inflows by about $2.19 billion over Q3 2023 through Q2 2024. The company said it was working to extend or refinance near-term facilities, including approximately $831 million of Q4 2023 repurchase maturities, and intended to repay $300 million of senior notes due November 2023 using funds generated in the ordinary course.
- Other key risks include borrower defaults, declining property values, office-sector weakness associated with remote work, retail-sector pressure from e-commerce, interest-rate and foreign-exchange movements, asset/financing maturity mismatches, and availability and cost of liquidity. The company reported no material change to risk factors previously disclosed in its 2022 Form 10-K.
- Fair-value estimates rely in part on significant unobservable inputs, particularly for loans, affordable-housing investments and securitization VIE assets. Actual realizations may differ materially from recorded estimates.
Important facts for investors to verify
- Track delinquent and nonaccrual loans, collateral valuations, specific charge-offs, and the continuing rise in CECL allowances.
- Review near-term secured-financing maturities, extension/refinancing outcomes, lender consent requirements and liquidity available to meet maturities and commitments.
- Assess whether portfolio yields continue to outpace funding costs as rates change, including the effectiveness and cost of interest-rate and currency hedges.
- Separate recurring cash earnings from GAAP results driven by Woodstar fair-value marks and other unrealized items; compare Distributable Earnings with the $0.48 quarterly dividend while recognizing the measure’s limitations.
- Monitor the new 2027 convertible notes, dilution and repayment choices, and the $1.76 billion of expected commercial and infrastructure loan funding commitments.