Starwood Property Trust, Inc. — Q3 2021 Form 10-Q
Business and period: Mortgage REIT focused on commercial and residential real estate lending, infrastructure lending, property ownership, and real estate investing and servicing in the U.S. and Europe. This unaudited report covers the quarter and nine months ended September 30, 2021. Comparisons below are year over year unless noted.
Financial performance and position
- Q3 revenue: $302.3 million, up 13.0% from $267.4 million. Q3 net income was $140.5 million, down from $164.7 million; net income attributable to Starwood was $128.6 million, or $0.44 per diluted share, versus $151.8 million, or $0.52 per diluted share.
- First nine months: Revenue was $880.4 million, up 4.1%; net income was $389.4 million versus $251.4 million, and net income attributable to Starwood was $356.3 million versus $224.7 million. Diluted EPS was $1.22 versus $0.79.
- Distributable Earnings (non-GAAP): $0.52 per diluted share in Q3, compared with $0.51 in Q2 2021 and $0.50 in Q3 2020. Nine-month Distributable Earnings were $1.53 per share versus $1.48. Management cautions this measure is not GAAP income, operating cash flow, or liquidity.
- Interest and yields: Commercial and residential lending segment net interest income was $143.5 million in Q3; infrastructure lending net interest income was $12.7 million. Q3 unlevered yields were 5.5% for the commercial and residential lending portfolio overall and 4.9% for infrastructure held-for-investment loans and securities. Corresponding weighted average secured borrowing rates were 2.4% and 2.8%.
- Assets and loans: Total assets were $82.0 billion versus $80.9 billion at year-end 2020. Net loans were $15.5 billion, up from $12.1 billion; loans held-for-investment were $13.3 billion and loans held-for-sale $2.2 billion. Credit loss allowance on funded loans was $57.6 million, down from $77.4 million at year-end.
- Debt and equity: Secured financing agreements were $11.5 billion, CLO and single-asset securitization debt $2.6 billion, and unsecured senior notes $1.7 billion, net of discounts and costs. Total equity was $4.8 billion. Consolidated securitization VIE liabilities of $60.9 billion are presented separately; those obligations are non-recourse and their assets are restricted to settling VIE obligations.
- Liquidity and cash flow: Cash and cash equivalents were $273.3 million and restricted cash $110.5 million, compared with $563.2 million and $158.9 million at year-end 2020. For the first nine months, GAAP operating cash flow was negative $461.8 million, investing cash flow negative $2.0 billion, and financing cash flow positive $2.1 billion. Management stated it believes liquidity and access to additional liquidity are sufficient for obligations over at least the next 12 months.
- Dividend: The company declared quarterly dividends of $0.48 per share in each of the first three quarters of 2021.
Material changes and notable items
- Loan growth and financing activity were substantial: the company originated or acquired $5.6 billion of commercial loans in the first nine months and acquired $2.7 billion of residential loans. It launched two CLOs and a single-asset securitization during 2021.
- The nine-month credit loss expense was a $12.4 million reversal, compared with a $55.3 million provision in 2020, mainly reflecting improved macroeconomic forecasts after COVID-related deterioration in the prior-year period.
- Q3 results included $41.8 million of net derivative gains, compared with a $28.1 million loss in Q3 2020, alongside a $27.0 million foreign-currency loss. Fair-value changes, derivative results, and consolidated VIE accounting materially affect reported earnings.
- Q3 income attributable to Starwood declined year over year despite improved nine-month earnings. For the nine months, commercial and residential lending earnings benefited from lower credit loss provisions; property results improved substantially, including favorable derivative comparisons; and corporate costs rose.
- Subsequent to quarter end, the company entered a $380 million Woodstar I refinancing. On November 5, 2021, it agreed to sell third-party investors a 20.6% interest in a fund holding the Woodstar I and II affordable housing portfolios for $216 million, subject to post-closing adjustments.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. The company’s liquidity outlook is management’s assessment, not a guarantee.
- Key disclosed risks include COVID-19 and its effects on borrowers, property tenants and the economy; borrower defaults and collateral value impairment; interest-rate, foreign-exchange and prepayment risk; availability and cost of funding; and refinancing or timing mismatches between asset repayments and financing maturities.
- At September 30, the company reported $1.35 billion of expected commercial loan funding commitments, $877.7 million of residential loan purchase commitments, and $150.4 million of infrastructure funding commitments. Commitments are generally conditional on specified requirements.
- A $196.2 million commercial loan and $19.5 million of residential loans were 90 days or more past due. The commercial loan and a $13.1 million infrastructure loan in forbearance were on nonaccrual; management said it then expected to recover amounts due and did not classify them as credit deteriorated.
- The company was in compliance with secured-financing and unsecured-note covenants at quarter end. It noted financing maturities and stated it was in discussions with lenders to extend, amend, or replace facilities where appropriate. It also identified uncertainties in fair-value estimates and credit-loss assumptions, including those related to COVID-19.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether Distributable Earnings of $0.52 per share in Q3 and $1.53 year to date adequately support the $0.48 quarterly dividend, bearing in mind the measure’s non-GAAP nature.
- The status, repayment expectations, collateral and credit performance of past-due and nonaccrual loans, particularly the $196.2 million commercial loan.
- Funding plans and lender-extension assumptions for near-term maturities, alongside the scale of outstanding loan and purchase commitments.
- How much reported earnings and asset value depend on fair-value estimates, derivatives, foreign exchange and consolidated VIE accounting.
- Closing terms and proceeds from the post-quarter Woodstar fund interest sale, and the use and impact of the Woodstar refinancing.