Starwood Property Trust, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Starwood Property Trust is an externally managed REIT focused on commercial and residential real estate lending, infrastructure lending, property ownership, and real estate investing and servicing.
Financial performance and position
| Metric | Q2 2022 | Comparable period |
|---|---|---|
| Total revenue | $325.6 million | $290.9 million in Q2 2021 |
| Net income | $281.7 million | $126.4 million in Q2 2021 |
| Net income attributable to Starwood Property Trust | $212.3 million | $116.3 million in Q2 2021 |
| Diluted EPS | $0.67 | $0.40 in Q2 2021 |
| Distributable Earnings, non-GAAP | $162.5 million; $0.51 per diluted share | $0.76 per share in Q1 2022; $0.51 in Q2 2021 |
- For the first half of 2022, revenue was $619.6 million, net income was $666.0 million, net income attributable to the company was $536.9 million, and diluted EPS was $1.69. Distributable Earnings were $402.5 million, or $1.27 per diluted share, compared with $304.0 million, or $1.02 per share, in the first half of 2021.
- Q2 interest income from loans and investment securities totaled $276.5 million; interest expense was $152.6 million. In the Commercial and Residential Lending segment, Q2 net interest income was $161.9 million, up $7.2 million sequentially. Higher loan income was partly offset by higher funding costs.
- At June 30, 2022, total assets were $83.1 billion and total equity was $6.8 billion. Cash and cash equivalents were $272.2 million, with $64.6 million of restricted cash.
- Debt carrying amounts included $13.1 billion of secured financing agreements, $3.8 billion of CLO and single-asset securitization financing, and $2.3 billion of unsecured senior notes. These sum to approximately $19.2 billion; a substantial portion of reported assets and liabilities relates to securitization VIEs and is nonrecourse to the company. The filing does not provide a single consolidated leverage ratio.
- GAAP operating cash flow was $685.2 million for the first half; investing cash flow was negative $2.5 billion and financing cash flow was positive $1.8 billion. Cash, cash equivalents and restricted cash increased $16.0 million, including foreign-exchange effects.
- The company declared quarterly dividends of $0.48 per share. Management stated it believed liquidity and access to additional liquidity were sufficient for financial obligations for at least the next 12 months.
Material changes and unusual items
- Income from affordable housing fund investments was $307.2 million in Q2 and $541.2 million for the first half. The first-half amount included $518.5 million of unrealized fair-value gains, principally reflecting the Woodstar Fund’s property valuations. This is a major contributor to GAAP earnings and is not equivalent to recurring cash income.
- First-half fair-value changes on mortgage loans were a $239.3 million loss, largely reflecting higher interest rates and wider credit spreads on fixed-coupon residential loans. Derivative gains were $255.9 million, partly offsetting market-related losses; foreign-currency losses were $105.9 million.
- Rental revenue declined year over year, in part because the Woodstar affordable-housing portfolios transitioned to investment-company fair-value accounting through the Woodstar Fund. This makes some period comparisons less directly comparable.
- The company recorded an $86.6 million gain on the first-half sale of a foreclosed Florida distribution facility and an $11.7 million gain on another property sale. Q2 results also included a $32.7 million estimated loss contingency tied to previously sold agency-eligible residential loans.
- At June 30, $501.0 million of loans were at least 90 days past due; management said it expected to recover amounts due and did not classify these loans as credit deteriorated. Separately, $38.2 million of loans were classified as credit deteriorated and on nonaccrual, with a $15.0 million allowance associated with the identified exposures described in the filing.
Outlook, risks and contingencies
- No quantitative earnings guidance was provided. Management described its strategy as unchanged and said it was in discussions with lenders regarding facilities with near-term expirations.
- The filing identifies interest-rate and credit-spread movements, borrower defaults, collateral-value declines, liquidity and refinancing availability, currency movements, and asset/funding maturity mismatches as important risks. It also highlights uncertainty from COVID-19 and geopolitical events.
- Approximately $2.6 billion of commercial loan funding commitments were expected to be funded, alongside $130.1 million of residential loan purchase commitments and infrastructure commitments and purchase obligations. A $729.1 million forward agreement to reacquire residential loans was subject to a financing contingency; if financing was not arranged, the prior sale-price contingency could be reinstated.
- Management reported compliance with secured financing and unsecured note covenants. It also disclosed a projected net financing outflow of about $905 million in Q2 2023, primarily tied to facilities the company said it historically extended and intended to continue seeking to extend, subject to lender consent.
- Unrealized fair values—particularly Woodstar property valuations and fair-valued loans—depend on estimates and unobservable inputs; actual realizations may differ. The company reported no material changes to previously disclosed risk factors and no material pending legal proceedings.
Most important facts for investors to verify
- How much of reported earnings and distributable performance is recurring, versus Woodstar unrealized valuation gains, loan and derivative marks, and property-sale gains.
- Performance and resolution plans for past-due and nonaccrual loans, including the $501.0 million past-due balance and the separately identified credit-deteriorated exposures.
- Refinancing or extension progress for near-term secured facilities, including the projected Q2 2023 financing shortfall and the $729.1 million contingent residential-loan purchase.
- How rising rates affect asset yields, borrowing costs, borrower repayment capacity, and the company’s ability to maintain its dividend.
- The assumptions supporting Woodstar property valuations and the sensitivity of fair-valued assets and liabilities to market conditions.
Distributable Earnings is a company-defined non-GAAP measure; the filing cautions that it is not GAAP net income, operating cash flow, or a measure of liquidity.