Starwood Property Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Starwood Property Trust (STWD) originates, acquires, finances and manages real estate and infrastructure debt and property investments across four segments: commercial and residential lending, infrastructure lending, property, and investing and servicing.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $490.4 million | $294.0 million |
| Interest expense | $335.3 million | $126.5 million |
| Credit loss provision (reversal) | $43.2 million | $(3.7) million |
| Net income attributable to STWD | $52.0 million | $324.6 million |
| Diluted GAAP EPS | $0.16 | $1.02 |
| Distributable Earnings (non-GAAP) | $157.2 million; $0.49 per diluted share | $240.0 million; $0.76 per diluted share |
Revenue growth was led by higher loan interest income as average rates and loan balances increased. Higher funding costs and credit loss provisions absorbed much of that increase. The year-over-year GAAP earnings comparison was also affected by unusually large prior-year gains, including Woodstar fair-value gains and property-sale gains; Q1 2023 included substantially lower Woodstar fair-value income. Distributable Earnings is a company-defined non-GAAP measure and should not be treated as GAAP earnings, cash flow, liquidity or taxable income.
Balance sheet, cash flow and capital
- At March 31, total assets were $77.35 billion, including $50.53 billion of securitization VIE assets; total liabilities were $70.24 billion and permanent equity was $6.75 billion. Consolidated securitization VIE assets and liabilities are largely restricted and non-recourse, so reported totals include balances not generally available to meet STWD’s obligations.
- Cash and cash equivalents were $395.8 million and restricted cash was $135.6 million. Cash, cash equivalents and restricted cash increased $148.7 million during the quarter.
- GAAP operating cash flow was negative $28.6 million; investing activities provided $13.0 million and financing activities provided $164.3 million. The company reported $322.9 million of cash interest paid.
- Debt included $14.85 billion of secured financing agreements, $3.67 billion of CLO/SASB financing and $2.33 billion of unsecured senior notes. These balances exclude the separately presented, largely non-recourse VIE liabilities.
- The quarterly dividend declared was $0.48 per share. The $250 million convertible notes matured and were repaid in cash on April 1, 2023, after quarter-end.
Portfolio, credit and period changes
- Net loans totaled $21.26 billion, including $18.45 billion held for investment and $2.81 billion held for sale. The credit loss allowance on funded loans rose to $134.4 million from $99.4 million at year-end; HTM securities also had a $10.2 million allowance.
- Management identified $280.4 million of loans at least 90 days past due; all were on nonaccrual except a $156.4 million Brooklyn office loan. Additional nonaccrual loans included a $216.6 million New Jersey retail/entertainment loan and a $120.8 million Washington, D.C. office loan; management said it expected recovery of amounts due on those two loans.
- A $12.9 million infrastructure loan participation was deemed credit deteriorated following the borrower’s bankruptcy and received a $6.7 million specific allowance. A coal-fired power plant bond was placed on nonaccrual after operating shortfalls and restructuring; its specific allowance increased to approximately $10.0 million.
- Q1 activity included $259.1 million of commercial loan originations/additional funding, $172.5 million of infrastructure lending activity and $160.0 million of infrastructure loan acquisitions. The company added two special-servicing assignments, bringing its named special-servicing portfolio to $106.7 billion.
- Management reported that lending yields increased with index rates, but borrowing costs also rose. Commercial and residential lending segment net interest income increased to $181.7 million from $154.7 million in Q1 2022; infrastructure segment net interest income increased to $23.3 million from $15.8 million.
Liquidity, outlook and risks
Management stated that current liquidity and access to additional liquidity should be sufficient to meet financial obligations for at least the next 12 months. It also said it was discussing extensions, amendments or replacements for facilities with near-term expirations. Its scheduled/projected principal analysis showed net financing outflows of approximately $1.01 billion in Q4 2023 and $583 million in Q1 2024, primarily reflecting facilities management intended to extend or refinance and the $300 million senior notes due November 2023. These plans are subject to lender consent and financing availability. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
Management described market volatility associated with inflation, rising interest rates, slower growth, geopolitical uncertainty and recent bank failures, which it said had reduced liquidity and credit availability. Higher rates may support income on floating-rate assets but can strain borrowers and collateral cash flows. The filing also highlights office-sector weakness tied to remote work and retail pressure from e-commerce. Other stated risks include borrower defaults, collateral impairment, refinancing and asset-liability maturity mismatches, market-value changes, currency and interest-rate exposure, and availability and cost of liquidity. The company reported compliance with its debt covenants, effective disclosure controls, and no material change in previously disclosed risk factors or material pending legal proceedings.
Investor facts to verify
- Reconcile GAAP earnings with Distributable Earnings and assess the effects of non-cash fair-value changes, credit provisions and prior-period unusual gains.
- Review the status, collateral and expected recoveries for past-due and nonaccrual loans, and the adequacy of loan and securities credit allowances.
- Confirm refinancing or extension plans for near-term facilities and the November 2023 $300 million notes; note the convertible notes were repaid after quarter-end.
- Assess liquidity available for the $2.0 billion of expected commercial loan funding commitments and other contractual commitments, alongside the dividend and funding needs.
- Evaluate sensitivity to interest rates, borrower stress and real estate market conditions, particularly office and retail, and distinguish non-recourse VIE balances from corporate obligations.