Starwood Property Trust, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. STWD is an externally managed REIT investing in commercial and residential real estate loans, infrastructure debt, properties, and real estate investing and servicing businesses.
Key financial results
Amounts in millions, except per-share data. Comparisons are with the same 2020 period unless noted.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $290.9 | $265.6 | $578.1 | $578.2 |
| Net income attributable to STWD | $116.3 | $139.7 | $227.7 | $72.9 |
| Diluted EPS | $0.40 | $0.49 | $0.78 | $0.25 |
| Distributable Earnings per diluted share (non-GAAP) | $0.51 | $0.43 | $1.02 | $0.98 |
| Interest expense | $109.7 | $101.5 | $213.0 | $221.5 |
| Credit loss provision (reversal), net | $(11.8) | $10.2 | $(11.8) | $58.9 |
Second-quarter revenue increased 9.5% year over year, while attributable net income and diluted EPS declined. First-half revenue was essentially unchanged, but net income rose substantially, reflecting lower credit-loss provisions and improved other income, including fair-value and derivative results. Distributable Earnings is a company-defined non-GAAP measure; it excludes various items, including unrealized gains and losses and credit-loss reserves, and is not equivalent to GAAP income or cash available for dividends.
Balance sheet, cash flow and liquidity
- Assets and equity: Total assets were $81.3 billion and total equity $4.9 billion at June 30, 2021. The balance sheet includes $63.5 billion of securitization VIE assets and $62.0 billion of associated liabilities; these obligations are generally non-recourse to STWD and the assets are restricted to settling VIE obligations.
- Cash: Cash and cash equivalents were $254.6 million, with restricted cash of $106.0 million; combined cash and restricted cash was $360.6 million, down from $722.2 million at year-end 2020.
- Loans: Net loans totaled $13.7 billion, up from $12.1 billion at year-end. The allowance for funded loan credit losses was $59.8 million; the allowance including unfunded commitments was $64.7 million.
- Borrowings: Balance-sheet carrying values included $9.9 billion of secured financing agreements, $2.4 billion of CLOs, and $1.7 billion of unsecured senior notes. The $700 million 5.00% senior notes mature in December 2021. STWD reported compliance with its debt covenants at June 30.
- Cash flows, first half: GAAP operating cash flow was $288.0 million; investing cash flow was $(1.37) billion; financing cash flow was $717.8 million. Net cash, cash equivalents and restricted cash decreased $359.9 million. Management’s liquidity discussion, excluding specified securitization-VIE effects, reported operating cash flow of $139.0 million and financing cash flow of $939.5 million.
- Dividend: The board declared a quarterly dividend of $0.48 per share, payable July 15, 2021. Management stated it believed liquidity and access to additional liquidity were sufficient for obligations for at least the next 12 months.
Material changes and operating developments
- First-half credit-loss expense shifted from a $58.9 million provision in 2020 to an $11.8 million reversal in 2021, which management attributed primarily to improved macroeconomic forecasts. The reversal is not a cash receipt and is excluded from Distributable Earnings under the company’s methodology.
- Net loans increased during the half as STWD originated and funded loans; first-half originations, purchases and additional funding totaled $5.37 billion, alongside $2.35 billion of maturities and principal repayments.
- STWD issued two CLOs in 2021: a $1.3 billion commercial-loan CLO in May and a $500 million infrastructure-loan CLO in April. Third parties purchased $1.1 billion and $410 million, respectively, of the notes issued.
- Servicing fees increased year over year, which management linked to higher volumes of COVID-19-related loan modifications, resolutions and liquidations. Property-segment rental revenue also increased modestly.
- Property sales generated reported gains, including a $17.7 million gain on the sale of a foreclosed grocery-distribution facility and a $9.7 million gain on a REIS portfolio property.
Outlook, risks and contingencies
- No quantified earnings or revenue guidance was provided. Management said its liquidity strategy was unchanged and expected available resources to cover obligations for at least 12 months, while noting that access to capital markets is not assured.
- The projected financing repayment schedule showed a fourth-quarter 2021 funding shortfall driven mainly by the $700 million senior-note maturity. After quarter-end, STWD issued $400 million of 3.625% senior notes due 2026; management also cited cash, secured-facility capacity and other financing as potential repayment sources.
- At June 30, commercial loan funding commitments were $1.5 billion, of which management expected to fund $1.4 billion; residential loan purchase commitments were $406.0 million. Infrastructure commitments and purchase commitments were also outstanding.
- Credit exposures included a $188.5 million commercial loan and $17.4 million of residential loans at least 90 days past due. A $13.8 million infrastructure loan was in forbearance. The commercial and infrastructure exposures described as nonaccrual were not considered credit deteriorated where management expected recovery; actual recoveries remain uncertain.
- Management highlighted COVID-19 and its variants, borrower and tenant payment capacity, collateral values, loan defaults, refinancing and asset/financing maturity mismatches, interest rates, liquidity availability and cost, and fair-value estimation as risks. It noted that the pandemic’s impacts and related estimates remained uncertain.
- Interest-rate sensitivity analysis estimated that a 1 percentage-point increase in applicable rates would reduce annual net investment income by $23.5 million, after hedging. Foreign-currency hedges may not fully offset exposures and may require collateral.
- STWD reported no material change in previously disclosed risk factors, no material pending or threatened legal proceedings, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether the December 2021 $700 million note maturity and other near-term financing needs are refinanced or repaid on acceptable terms; confirm the use and sufficiency of the July 2021 note proceeds.
- Performance, collateral values and eventual recoveries for past-due and forborne loans, and whether credit-loss reversals remain appropriate as economic forecasts change.
- Dividend coverage using both taxable income and Distributable Earnings, including the non-GAAP measure’s exclusions and its relationship to cash generation.
- Exposure to fair-value estimates: a substantial portion of reported fair-value assets, including VIE assets, uses Level III inputs or management estimates.
- Funding and liquidity needs arising from loan commitments, financing maturities, collateral or margin requirements, and interest-rate and foreign-currency movements.