STARWOOD PROPERTY TRUST, INC. quarterly report, Q1 FY2022

Starwood Property Trust, Inc. — Q1 2022 Form 10-Q

Reporting period: Three months ended March 31, 2022. Starwood Property Trust is an externally managed REIT investing in commercial and residential real estate loans, infrastructure debt, property, and real estate investing and servicing businesses. Financial amounts below are in U.S. dollars.

Financial results and key metrics

Metric	Q1 2022	Q1 2021
Total revenue	$294.0 million	$287.2 million
Net income	$384.3 million	$122.5 million
Net income attributable to Starwood Property Trust	$324.6 million	$111.4 million
Basic / diluted EPS	$1.04 / $1.02	$0.39 / $0.38
Distributable Earnings (non-GAAP)	$240.0 million; $0.76 per diluted share	$150.8 million; $0.50 per diluted share
Net cash provided by operating activities	$154.4 million	$270.8 million

At March 31, 2022, total assets were $81.2 billion and total liabilities were $74.3 billion, including $56.2 billion of VIE liabilities. Cash and cash equivalents were $264.2 million; restricted cash was $109.6 million. Loans held for investment, net, totaled $16.3 billion, and loans held for sale totaled $2.7 billion. The company reported $11.5 billion of secured financing agreements, $3.8 billion of CLO and single-asset securitization debt, and $2.3 billion of unsecured senior notes, all net of applicable discounts and financing costs. CLO and securitization obligations are generally non-recourse and backed by their own assets.

Operating cash flow was $154.4 million; investing activities used $554.8 million and financing activities provided $452.5 million. Cash, cash equivalents and restricted cash increased $52.1 million during the quarter. The board declared a quarterly dividend of $0.48 per share. Management stated that available liquidity and access to additional liquidity were sufficient for obligations over at least the next 12 months.

Material changes versus Q1 2021

• Revenue increased 2.4%, while net income attributable to the company rose to $324.6 million from $111.4 million. The increase in GAAP earnings was driven substantially by fair-value and transaction items, not solely recurring lending income.
• Income from affordable housing fund investments was $234.0 million, including $223.9 million of unrealized fair-value gains. The Woodstar Fund’s consolidation and investment-company accounting affect comparison with prior periods.
• Gain on sale of investments and other assets was $98.5 million, including an $86.6 million gain on a foreclosed Florida distribution facility and an $11.7 million gain on another property sale. Net derivative gains were $127.3 million, while fair-value changes in mortgage loans produced a $125.8 million loss.
• Interest income from loans increased to $233.6 million from $190.6 million, but interest expense also rose to $126.5 million from $103.4 million, reflecting higher average borrowings. Total revenue was only modestly higher as rental income fell to $31.6 million from $76.3 million, largely reflecting the Woodstar Fund structure and portfolio changes.
• Distributable Earnings increased to $0.76 per diluted share from $0.50. This non-GAAP measure excludes specified unrealized and other items; it is not GAAP net income, operating cash flow, liquidity, or taxable income.

Outlook, risks, contingencies and unusual items

• Funding and maturities: The company reported approximately $3.1 billion of commercial loan funding commitments, of which it expected to fund $2.8 billion; $1.2 billion of residential loan purchase commitments; and $147.2 million of infrastructure funding commitments, plus $20.6 million of infrastructure loan purchase commitments. A projected financing repayment shortfall of $290.8 million through Q1 2023 was disclosed, including a $958.8 million shortfall in that quarter, primarily tied to facilities the company expected to extend or replace with lender consent.
• Credit: Loans with a combined amortized cost of $505.2 million were at least 90 days past due. Management said it expected full recovery on those loans. Separately, $38.2 million of loans were classified as credit deteriorated and on nonaccrual, with related allowances described in the filing. The funded loan credit-loss allowance was $68.3 million; the quarter included a net reversal of credit-loss provision.
• Interest rates and funding: The portfolio and financing include variable-rate instruments, derivatives and legacy LIBOR references. Management warned that benchmark-rate transition could raise funding costs or create asset-liability mismatches. A 0.5% rate increase was estimated to reduce annual net investment income by $0.6 million after hedging; a 1.0% increase was estimated to raise it by $5.4 million.
• Valuation and market risk: Significant assets, including Woodstar properties and many loans, use Level III valuations and unobservable assumptions. Actual realized amounts may differ materially from reported fair values. The filing cites inflation, widening credit spreads, economic uncertainty, COVID-19 effects, geopolitical events including Russia’s invasion of Ukraine, borrower defaults, collateral impairment, and liquidity availability as risks.
• Related parties and governance: The external Manager is an affiliate controlled by the company’s CEO. Q1 management fees were $55.3 million, including $29.0 million of incentive fees. The filing also discloses related-party loan and property-management arrangements.
• Other developments: The company issued $500 million of 4.375% senior notes due 2027 in January and completed new CLO financings. It reported compliance with debt covenants, no material change in previously disclosed risk factors, and no material pending legal proceedings. Shareholders approved new equity plans and an employee stock purchase plan in April 2022.

Important facts for investors to verify

• How much Q1 earnings and Distributable Earnings reflect recurring lending and servicing performance versus Woodstar fair-value gains, property-sale gains, and derivative movements.
• The ongoing performance, collateral quality, nonaccrual status, and eventual recoveries of the $505.2 million of 90-days-past-due loans and the $38.2 million of credit-deteriorated loans.
• The company’s ability to fund commitments and refinance, extend, or replace facilities associated with the projected near-term financing shortfall, including any conditions imposed by lenders.
• Changes in borrowing costs, hedging effectiveness, and remaining LIBOR-transition exposure as reference rates change.
• Whether operating cash generation and future taxable income support the $0.48 quarterly dividend, considering that GAAP earnings and Distributable Earnings are not measures of cash available for distribution.
• The assumptions and sensitivity underlying Level III valuations, particularly the Woodstar portfolio’s reported unrealized gains.