Starwood Property Trust, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Starwood Property Trust is an externally managed REIT focused on commercial real estate lending, property ownership, and real estate investing and servicing in the U.S. and Europe. Comparisons are with Q1 2017 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance and position
- Revenue: $260.6 million, up 31.1% from $198.7 million. Growth reflected higher loan interest income, servicing fees, and rental income, including contributions from property acquisitions.
- Profit: Net income attributable to Starwood Property Trust was $99.9 million, down from $102.4 million. Diluted EPS was $0.38 versus $0.39. The quarter included a $16.9 million net derivative loss, partly offset by a $13.5 million foreign-currency gain and $10.7 million net gains on sales of investments and other assets.
- Supplemental performance measure: Management-reported non-GAAP Core Earnings were $155.8 million, or $0.58 per diluted share, versus $131.8 million, or $0.51, a year earlier. The filing cautions Core Earnings is not GAAP net income, operating cash flow, or a measure of liquidity.
- Cash flow: Operating cash flow was $92.4 million, versus negative $196.0 million in Q1 2017; investing cash flow was positive $395.4 million, versus negative $286.1 million; financing cash flow was negative $527.1 million, versus positive $93.8 million. Cash, cash equivalents, and restricted cash ended at $379.4 million, down $39.3 million during the quarter.
- Assets and equity: Total assets were $61.1 billion, down from $62.9 billion at year-end; equity was $4.7 billion, up from $4.6 billion.
- Debt and liquidity: Secured financing agreements were $5.55 billion, unsecured senior notes $2.25 billion, and secured borrowings on transferred loans $74.3 million. These exclude $48.2 billion of VIE liabilities, which relate to consolidated securitization entities and are not recourse to the Company. Management said liquidity and access to additional liquidity were sufficient for obligations for at least 12 months. The Company reported compliance with financing covenants.
- Dividends: The Company declared $0.48 per common share for Q1 and, after quarter-end, declared another $0.48 per share for Q2.
Material changes versus the prior comparable period
- Loan interest income rose to $137.6 million from $111.9 million, while total interest expense increased to $87.2 million from $65.9 million.
- Lending Segment net interest income increased to $117.4 million from $101.8 million. Its weighted-average unlevered yield increased to 7.4% from 7.1%; weighted-average secured borrowing rates rose to 4.1% from 3.6%.
- Rental income increased to $81.1 million from $57.0 million, primarily reflecting the Master Lease and Woodstar II portfolios acquired after Q1 2017. Servicing fees increased to $26.1 million from $14.1 million, mainly due to higher default interest collections and loan modification fees.
- Costs and expenses increased to $213.4 million from $164.9 million, including higher interest, management fees, rental operating costs, and depreciation and amortization.
- Net income attributable to non-controlling interests rose to $4.9 million from $0.5 million, partly reflecting the Woodstar II transaction.
Outlook, commentary, risks, and unusual items
- No specific earnings or investment guidance was provided. Management said its liquidity strategy and leverage and risk-management strategies had not materially changed.
- In Q1, the Company acquired 18 Woodstar II affordable housing communities comprising 4,057 units, with stated total consideration of $404.7 million including contingent consideration. The full 27-community portfolio comprises 6,109 units and was reported 99% occupied. The acquisition was funded in part with $300.9 million of new 10-year fixed-rate mortgage debt.
- The Company issued $500 million of 3.625% senior notes due 2021 and repaid the 4.55% convertible notes due 2018 at maturity. It also repurchased 573,255 common shares for $12.1 million.
- Future loan funding commitments totaled $1.7 billion on 50 loans; management expected to fund $1.4 billion. Contractual obligations also included $5.6 billion of secured financings and $2.3 billion of unsecured notes.
- Management identified risks including borrower defaults, declines in collateral values, interest-rate and credit-spread changes, financing availability and costs, liquidity, and mismatches between asset repayments and financing maturities. It was in discussions with lenders regarding facilities with near-term expirations. Scheduled secured-financing principal repayments were $352.2 million for the remainder of 2018 and $390.1 million for 2019, subject to stated assumptions and extensions.
- Approximately 92.8% of held-for-investment loans were variable rate. The quarter included $1.5 million of loan-loss provision; the Company said no individual loans were impaired, while its allowance was $5.9 million. Management expected the forthcoming expected-credit-loss accounting standard to increase loan-loss allowances; the amount was still under assessment.
- Two CDO structures were in default but were not consolidated. The Company reported maximum loss exposure of $24.0 million for securitization VIEs for which it was not the primary beneficiary. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether loan portfolio credit quality, delinquencies, collateral values, and the $5.9 million allowance adequately reflect potential losses, including the expected impact of the new credit-loss standard.
- Liquidity available to meet the $1.4 billion of expected loan funding and near-term financing maturities, and the conditions for facility extensions or renewals.
- The sustainability of Core Earnings and the $0.48 quarterly dividend; Core Earnings is non-GAAP and exceeded GAAP diluted EPS in the quarter.
- The assumptions and sensitivity behind Level III valuations, particularly the large consolidated VIE asset and liability balances and other fair-value estimates.
- The terms and potential dilution or cash requirements associated with Woodstar II Class A units, which become redeemable beginning six months after issuance, and the related contingent unit rights.