stwd_Current folio_10Q

Table of Contents 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2015

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34436

 


 

Starwood Property Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Maryland

 

27-0247747

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

591 West Putnam Avenue

 

 

Greenwich, Connecticut

 

06830

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(203) 422-8100

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of May 1, 2015 was 238,126,915.

 

 

 

 


 

Table of Contents 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.

 

These forward-looking statements are based largely on our current beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors that may cause actual results to vary from our forward-looking statements include, but are not limited to:

 

·

factors described in our Annual Report on Form 10-K for the year ended December 31, 2014 and this Quarterly Report on Form 10-Q, including those set forth under the captions “Risk Factors” and “Business”;

 

·

defaults by borrowers in paying debt service on outstanding indebtedness;

 

·

impairment in the value of real estate property securing our loans;

 

·

availability of mortgage origination and acquisition opportunities acceptable to us;

 

·

our ability to fully integrate LNR Property LLC, a Delaware limited liability company (“LNR”), which was acquired on April 19, 2013, into our business and achieve the benefits that we anticipate from this acquisition;

 

·

potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;

 

·

national and local economic and business conditions;

 

·

general and local commercial and residential real estate property conditions;

 

·

changes in federal government policies;

 

·

changes in federal, state and local governmental laws and regulations;

 

·

increased competition from entities engaged in mortgage lending and securities investing activities;

 

·

changes in interest rates; and

 

·

the availability of and costs associated with sources of liquidity.

 

In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur. Except to the extent required by applicable law or regulation, we undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise.

2


 

Table of Contents 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

Part I 

Financial Information

 

Item 1. 

Financial Statements

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Operations

 

Condensed Consolidated Statements of Comprehensive Income

 

Condensed Consolidated Statements of Equity

 

Condensed Consolidated Statements of Cash Flows

 

Notes to Condensed Consolidated Financial Statements

10 

 

Note 1 Business and Organization

10 

 

Note 2 Summary of Significant Accounting Policies

11 

 

Note 3 Acquisitions and Divestitures

15 

 

Note 4 Loans

16 

 

Note 5 Investment Securities

20 

 

Note 6 Investment in Unconsolidated Entities

25 

 

Note 7 Goodwill and Intangible Assets

25 

 

Note 8 Secured Financing Agreements

26 

 

Note 9 Convertible Senior Notes

28 

 

Note 10 Loan Securitization/Sale Activities

29 

 

Note 11 Derivatives and Hedging Activity

30 

 

Note 12 Offsetting Assets and Liabilities

32 

 

Note 13 Variable Interest Entities

32 

 

Note 14 Related-Party Transactions

33 

 

Note 15 Stockholders’ Equity

35 

 

Note 16 Earnings per Share

37 

 

Note 17 Accumulated Other Comprehensive Income

38 

 

Note 18 Fair Value

39 

 

Note 19 Income Taxes

42 

 

Note 20 Commitments and Contingencies

44 

 

Note 21 Segment Data

44 

 

Note 22 Subsequent Events

49 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

50 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

68 

Item 4. 

Controls and Procedures

70 

Part II 

Other Information

 

Item 1. 

Legal Proceedings

71 

Item 1A. 

Risk Factors

71 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

71 

Item 3. 

Defaults Upon Senior Securities

71 

Item 4. 

Mine Safety Disclosures

71 

Item 5. 

Other Information

71 

Item 6. 

Exhibits

73 

 

 

 

3


 

Table of Contents 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

(Unaudited, amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

    

As of

    

As of

 

 

 

March 31, 2015

 

December 31, 2014

 

Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

360,720 

 

$

255,187 

 

Restricted cash

 

 

39,568 

 

 

48,704 

 

Loans held-for-investment, net

 

 

6,040,825 

 

 

5,779,238 

 

Loans held-for-sale, at fair value

 

 

343,770 

 

 

391,620 

 

Loans transferred as secured borrowings

 

 

95,000 

 

 

129,427 

 

Investment securities ($519,625 and $556,253 held at fair value)

 

 

1,021,311 

 

 

998,248 

 

Intangible assets—servicing rights ($130,761 and $132,303 held at fair value)

 

 

138,802 

 

 

144,152 

 

Investment in unconsolidated entities

 

 

209,833 

 

 

193,983 

 

Goodwill

 

 

140,437 

 

 

140,437 

 

Derivative assets

 

 

58,601 

 

 

26,628 

 

Accrued interest receivable

 

 

39,121 

 

 

40,102 

 

Other assets

 

 

128,848 

 

 

135,506 

 

Variable interest entity (“VIE”) assets, at fair value

 

 

103,363,978 

 

 

107,816,065 

 

Total Assets 

 

$

111,980,814 

 

$

116,099,297 

 

Liabilities and Equity

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

112,954 

 

$

144,516 

 

Related-party payable

 

 

27,673 

 

 

40,751 

 

Dividends payable

 

 

108,435 

 

 

108,189 

 

Derivative liabilities

 

 

11,945 

 

 

5,476 

 

Secured financing agreements, net

 

 

3,711,834 

 

 

3,137,789 

 

Convertible senior notes, net

 

 

1,324,125 

 

 

1,418,022 

 

Secured borrowings on transferred loans

 

 

95,000 

 

 

129,441 

 

VIE liabilities, at fair value

 

 

102,708,732 

 

 

107,232,201 

 

Total Liabilities 

 

 

108,100,698 

 

 

112,216,385 

 

Commitments and contingencies (Note 20)

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and outstanding 

 

 

 —

 

 

 —

 

Common stock, $0.01 per share, 500,000,000 shares authorized, 225,550,418 issued and 224,336,668 outstanding as of March 31, 2015 and 224,752,053 issued and 223,538,303 outstanding as of December 31, 2014

 

 

2,255 

 

 

2,248 

 

Additional paid-in capital

 

 

3,837,040 

 

 

3,835,725 

 

Treasury stock (1,213,750 shares)

 

 

(23,635)

 

 

(23,635)

 

Accumulated other comprehensive income

 

 

39,362 

 

 

55,896 

 

Retained earnings (accumulated deficit)

 

 

2,550 

 

 

(9,378)

 

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

3,857,572 

 

 

3,860,856 

 

Non-controlling interests in consolidated subsidiaries

 

 

22,544 

 

 

22,056 

 

Total Equity 

 

 

3,880,116 

 

 

3,882,912 

 

Total Liabilities and Equity 

 

$

111,980,814 

 

$

116,099,297 

 

 

See notes to condensed consolidated financial statements.

4


 

Table of Contents 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Operations

(Unaudited, amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

 

2015

    

2014

Revenues:

 

 

 

 

 

 

Interest income from loans

 

$

118,429 

 

$

104,910 

Interest income from investment securities

 

 

27,744 

 

 

29,454 

Servicing fees

 

 

28,257 

 

 

34,211 

Other revenues

 

 

4,419 

 

 

3,404 

Total revenues 

 

 

178,849 

 

 

171,979 

Costs and expenses:

 

 

 

 

 

 

Management fees

 

 

27,968 

 

 

27,821 

Interest expense

 

 

50,534 

 

 

37,831 

General and administrative

 

 

35,264 

 

 

46,101 

Acquisition and investment pursuit costs

 

 

1,186 

 

 

394 

Depreciation and amortization

 

 

4,085 

 

 

4,636 

Loan loss allowance, net

 

 

317 

 

 

497 

Other expense

 

 

2,073 

 

 

1,689 

Total costs and expenses 

 

 

121,427 

 

 

118,969 

Income before other income, income taxes and non-controlling interests 

 

 

57,422 

 

 

53,010 

Other income:

 

 

 

 

 

 

Income of consolidated VIEs, net

 

 

47,861 

 

 

56,004 

Change in fair value of servicing rights

 

 

(1,542)

 

 

(5,251)

Change in fair value of investment securities, net

 

 

(499)

 

 

8,361 

Change in fair value of mortgage loans held-for-sale, net

 

 

21,131 

 

 

20,893 

Earnings from unconsolidated entities

 

 

6,090 

 

 

64 

Gain on sale of investments and other assets, net

 

 

17,198 

 

 

1,555 

Gain (loss) on derivative financial instruments, net

 

 

24,623 

 

 

(7,866)

Foreign currency (loss) gain, net

 

 

(30,307)

 

 

1,477 

Total other-than-temporary impairment (“OTTI”)

 

 

 —

 

 

(1,192)

Noncredit portion of OTTI recognized in other comprehensive income (loss)

 

 

 —

 

 

979 

Net impairment losses recognized in earnings

 

 

 

 

 

(213)

Loss on extinguishment of debt

 

 

(5,292)

 

 

 —

Other income, net

 

 

45 

 

 

18 

Total other income 

 

 

79,308 

 

 

75,042 

Income from continuing operations before income taxes 

 

 

136,730 

 

 

128,052 

Income tax provision

 

 

(15,951)

 

 

(5,620)

Income from continuing operations 

 

 

120,779 

 

 

122,432 

Loss from discontinued operations, net of tax (Note 3)

 

 

 

 

 

(1,551)

Net income 

 

 

120,779 

 

 

120,881 

Net income attributable to non-controlling interests

 

 

(416)

 

 

(280)

Net income attributable to Starwood Property Trust, Inc.  

 

$

120,363 

 

$

120,601 

 

 

 

 

 

 

 

Earnings per share data attributable to Starwood Property Trust, Inc.:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Income from continuing operations

 

$

0.53 

 

$

0.62 

Loss from discontinued operations

 

 

 —

 

 

(0.01)

Net income

 

$

0.53 

 

$

0.61 

Diluted:

 

 

 

 

 

 

Income from continuing operations

 

$

0.52 

 

$

0.61 

Loss from discontinued operations

 

 

 —

 

 

(0.01)

Net income

 

$

0.52 

 

$

0.60 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.48 

 

$

0.48 

 

See notes to condensed consolidated financial statements.

 

 

5


 

Table of Contents 

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

 

2015

    

2014

Net income 

 

$

120,779 

 

$

120,881 

Other comprehensive (loss) income (net change by component):

 

 

 

 

 

 

Cash flow hedges

 

 

(263)

 

 

122 

Available-for-sale securities

 

 

(7,963)

 

 

3,498 

Foreign currency remeasurement

 

 

(8,308)

 

 

1,046 

Other comprehensive (loss) income

 

 

(16,534)

 

 

4,666 

Comprehensive income 

 

 

104,245 

 

 

125,547 

Less: Comprehensive income attributable to non-controlling interests

 

 

(416)

 

 

(280)

Comprehensive income attributable to Starwood Property Trust, Inc.  

 

$

103,829 

 

$

125,267 

 

See notes to condensed consolidated financial statements.

 

 

6


 

Table of Contents 

 

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited, amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Starwood

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated

 

Other

 

Property

 

 

 

 

 

 

 

 

 

Common stock

 

Additional

 

 

 

 

 

 

Deficit)

 

Comprehensive

 

Trust, Inc.

 

Non-

 

 

 

 

 

 

 

 

Par

 

Paid-in

 

Treasury Stock

 

Retained

 

Income

 

Stockholders’

 

Controlling

 

Total

 

 

    

Shares

    

Value

    

Capital

    

Shares

    

Amount

    

Earnings

    

(Loss)

    

Equity

    

Interests

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

224,752,053 

 

$

2,248 

 

$

3,835,725 

 

1,213,750 

 

$

(23,635)

 

$

(9,378)

 

$

55,896 

 

$

3,860,856 

 

$

22,056 

 

$

3,882,912 

 

Proceeds from DRIP Plan

 

2,303 

 

 

 —

 

 

55 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

55 

 

 

 —

 

 

55 

 

Equity component of 4.0% Convertible Senior Notes repurchase

 

 —

 

 

 —

 

 

(15,669)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,669)

 

 

 —

 

 

(15,669)

 

Share-based compensation

 

408,763 

 

 

 

 

7,487 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,491 

 

 

 —

 

 

7,491 

 

Manager incentive fee paid in stock

 

387,299 

 

 

 

 

9,442 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,445 

 

 

 —

 

 

9,445 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

120,363 

 

 

 —

 

 

120,363 

 

 

416 

 

 

120,779 

 

Dividends declared, $0.48 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(108,435)

 

 

 —

 

 

(108,435)

 

 

 —

 

 

(108,435)

 

Other comprehensive loss, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(16,534)

 

 

(16,534)

 

 

 —

 

 

(16,534)

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

431 

 

 

431 

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(359)

 

 

(359)

 

Balance, March 31, 2015

 

225,550,418 

 

$

2,255 

 

$

3,837,040 

 

1,213,750 

 

$

(23,635)

 

$

2,550 

 

$

39,362 

 

$

3,857,572 

 

$

22,544 

 

$

3,880,116 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

196,139,045 

 

$

1,961 

 

$

4,300,479 

 

625,850 

 

$

(10,642)

 

$

(84,719)

 

$

75,449 

 

$

4,282,528 

 

$

44,605 

 

$

4,327,133 

 

Share-based compensation

 

434,189 

 

 

 

 

7,203 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,207 

 

 

 —

 

 

7,207 

 

Manager incentive fee paid in stock

 

138,288 

 

 

 

 

3,306 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,308 

 

 

 —

 

 

3,308 

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

120,601 

 

 

 —

 

 

120,601 

 

 

280 

 

 

120,881 

 

Dividends declared, $0.48 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(95,424)

 

 

 —

 

 

(95,424)

 

 

 —

 

 

(95,424)

 

Spin-off of Starwood Waypoint Residential Trust

 

 —

 

 

 —

 

 

(1,118,743)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,118,743)

 

 

(1,594)

 

 

(1,120,337)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

4,666 

 

 

4,666 

 

 

 —

 

 

4,666 

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(31,787)

 

 

(31,787)

 

Balance, March 31, 2014

 

196,711,522 

 

$

1,967 

 

$

3,192,245 

 

625,850 

 

$

(10,642)

 

$

(59,542)

 

$

80,115 

 

$

3,204,143 

 

$

11,504 

 

$

3,215,647 

 

 

See notes to condensed consolidated financial statements.

 

7


 

Table of Contents 

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2015

    

2014

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

120,779 

 

$

120,881 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Amortization of deferred financing costs

 

 

3,510 

 

 

2,895 

 

Amortization of convertible debt discount and deferred fees

 

 

5,363 

 

 

2,988 

 

Accretion of net discount on investment securities

 

 

(10,603)

 

 

(7,398)

 

Accretion of net deferred loan fees and discounts

 

 

(10,179)

 

 

(1,806)

 

Amortization of net premium (discount) from secured borrowings on transferred loans

 

 

 

 

(787)

 

Share-based compensation

 

 

7,491 

 

 

7,207 

 

Share-based component of incentive fees

 

 

9,445 

 

 

3,308 

 

Change in fair value of fair value option investment securities

 

 

499 

 

 

(8,361)

 

Change in fair value of consolidated VIEs

 

 

(5,657)

 

 

(21,877)

 

Change in fair value of servicing rights

 

 

1,542 

 

 

5,251 

 

Change in fair value of loans held-for-sale

 

 

(21,131)

 

 

(20,893)

 

Change in fair value of derivatives

 

 

(26,724)

 

 

7,110 

 

Foreign currency loss (gain), net

 

 

30,416 

 

 

(1,492)

 

Gain on sale of investments and other assets

 

 

(17,198)

 

 

(2,498)

 

Other-than-temporary impairment

 

 

 —

 

 

213 

 

Loan loss allowance, net

 

 

317 

 

 

497 

 

Depreciation and amortization

 

 

3,692 

 

 

5,786 

 

Earnings from unconsolidated entities

 

 

(6,090)

 

 

(64)

 

Distributions of earnings from unconsolidated entities

 

 

7,030 

 

 

956 

 

Loss on extinguishment of debt

 

 

5,292 

 

 

 —

 

Originations of loans held-for-sale, net of principal collections

 

 

(413,027)

 

 

(261,733)

 

Proceeds from sale of loans held-for-sale

 

 

482,009 

 

 

302,461 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Related-party payable, net

 

 

(13,078)

 

 

11,665 

 

Accrued and capitalized interest receivable, less purchased interest

 

 

(17,341)

 

 

3,063 

 

Other assets

 

 

1,067 

 

 

(20,474)

 

Accounts payable, accrued expenses and other liabilities

 

 

(23,282)

 

 

(22,574)

 

Net cash provided by operating activities

 

 

114,146 

 

 

104,324 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(649,886)

 

 

(728,594)

 

Proceeds from principal collections on loans

 

 

285,741 

 

 

316,428 

 

Proceeds from loans sold

 

 

85,121 

 

 

146,400 

 

Purchase of investment securities

 

 

(67,247)

 

 

(9,890)

 

Proceeds from sales of investment securities

 

 

4,713 

 

 

27,883 

 

Proceeds from principal collections on investment securities

 

 

11,737 

 

 

8,227 

 

Deposit on property acquisition

 

 

(18,178)

 

 

 —

 

Proceeds from sale of properties

 

 

33,056 

 

 

1,784 

 

Purchase of other assets

 

 

(435)

 

 

 —

 

Investment in unconsolidated entities

 

 

(28,041)

 

 

 —

 

Distribution of capital from unconsolidated entities

 

 

11,296 

 

 

17,834 

 

Payments for purchase or termination of derivatives

 

 

(6,117)

 

 

(11,274)

 

Proceeds from termination of derivatives

 

 

6,988 

 

 

799 

 

Return of investment basis in purchased derivative asset

 

 

90 

 

 

407 

 

Decrease in restricted cash, net

 

 

5,326 

 

 

234 

 

Spin-off of Starwood Waypoint Residential Trust

 

 

 —

 

 

(111,960)

 

Acquisition and improvement of single family homes

 

 

 —

 

 

(61,901)

 

Proceeds from sale of non-performing loans

 

 

 —

 

 

1,153 

 

Net cash used in investing activities

 

 

(325,836)

 

 

(402,470)

 

 

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

 

2015

    

2014

Cash Flows from Financing Activities:

 

 

 

 

 

 

Borrowings under financing agreements

 

$

1,320,732 

 

$

997,767 

Principal repayments on and repurchases of borrowings

 

 

(847,288)

 

 

(656,573)

Payment of deferred financing costs

 

 

(1,263)

 

 

(7,418)

Proceeds from common stock issuances

 

 

55 

 

 

 —

Payment of dividends

 

 

(108,189)

 

 

(90,171)

Distributions to non-controlling interests

 

 

(359)

 

 

(31,788)

Issuance of debt of consolidated VIEs

 

 

6,763 

 

 

45,761 

Repayment of debt of consolidated VIEs

 

 

(51,538)

 

 

(53,385)

Distributions of cash from consolidated VIEs

 

 

3,790 

 

 

2,740 

Net cash provided by financing activities 

 

 

322,703 

 

 

206,933 

Net increase (decrease) in cash and cash equivalents

 

 

111,013 

 

 

(91,213)

Cash and cash equivalents, beginning of period

 

 

255,187 

 

 

317,627 

Effect of exchange rate changes on cash

 

 

(5,480)

 

 

57 

Cash and cash equivalents, end of period

 

$

360,720 

 

$

226,471 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

48,448 

 

$

44,638 

Income taxes paid

 

 

2,903 

 

 

2,725 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Net assets distributed in spin-off of Starwood Waypoint Residential Trust

 

$

 —

 

$

1,008,377 

Dividends declared, but not yet paid

 

 

108,435 

 

 

95,424 

Consolidation of VIEs (VIE asset/liability additions)

 

 

4,413,608 

 

 

20,236,513 

Deconsolidation of VIEs (VIE asset/liability reductions)

 

 

17,841 

 

 

1,289,569 

 

See notes to condensed consolidated financial statements.

 

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Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of March 31, 2015

(Unaudited)

 

1. Business and Organization

 

Starwood Property Trust, Inc. (“STWD” together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering (“IPO”). We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate-related debt investments in both the U.S. and Europe. We refer to the following as our target assets:

 

·

commercial real estate mortgage loans, including preferred equity interests;

 

·

CMBS; and

 

·

other commercial real estate-related debt investments.

 

Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

 

We have two reportable business segments as of March 31, 2015:

 

·

Real estate lending (the “Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS, RMBS and other real estate and real estate-related debt investments in both the U.S. and Europe that are held-for-investment.

 

·

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) servicing businesses in both the U.S. and Europe that manage and work out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions; and (iv) an investment business that selectively acquires commercial real estate assets. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

 

On January 31, 2014, we completed the spin-off of our former single family residential (“SFR”) segment to our stockholders. The newly-formed real estate investment trust, Starwood Waypoint Residential Trust (“SWAY”), is listed on the New York Stock Exchange (“NYSE”) and trades under the ticker symbol “SWAY.” Our stockholders received one common share of SWAY for every five shares of our common stock held at the close of business on January 24, 2014. As part of the spin-off, we contributed $100 million to the unlevered balance sheet of SWAY to fund its growth and operations. As of January 31, 2014, SWAY held net assets of $1.1 billion. The net assets of SWAY consisted of approximately 7,200 units of single-family homes and residential non-performing mortgage loans as of January 31, 2014. In connection with the spin-off, 40.1 million shares of SWAY were issued. Refer to Note 3 herein for additional information regarding SFR segment financial information, which has been presented within discontinued operations in the condensed consolidated statements of operations included herein.

 

We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal 

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corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of our taxable income to our stockholders by prescribed dates and comply with various other requirements.

 

We are organized as a holding company and conduct our business primarily through our various wholly-owned subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms of a management agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded and controlled by Mr. Sternlicht.

 

2. Summary of Significant Accounting Policies

 

Balance Sheet Presentation of the Investing and Servicing Segment’s Variable Interest Entities

 

As noted above, the Investing and Servicing Segment operates an investment business that acquires unrated, investment grade and non-investment grade rated CMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. Under accounting principles generally accepted in the United States of America (“GAAP”), SPEs typically qualify as variable interest entities (“VIEs”). These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

 

Because the Investing and Servicing Segment often serves as the special servicer of the trusts in which it invests, consolidation of these structures is required pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator of these VIEs.

 

The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, an allocable portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.

 

Refer to the segment data in Note 21 for a presentation of the Investing and Servicing Segment without consolidation of these VIEs.

 

Basis of Accounting and Principles of Consolidation

 

The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results for the full year.

 

Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed 

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quarterly, (ii) we view as critical, or (iii) became significant since December 31, 2014 due to a corporate action or increase in the significance of the underlying business activity.

 

Variable Interest Entities

 

We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Accounting Standards Codification (“ASC”) 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. We consider our variable interests as well as any variable interests of our related parties in making this determination. Where both of these factors are present, we are deemed to be the primary beneficiary and we consolidate the VIE. Where either one of these factors is not present, we are not the primary beneficiary and do not consolidate the VIE.

 

To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

 

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.

 

Our purchased investment securities include CMBS which are unrated and non-investment grade rated securities issued by CMBS trusts. In certain cases, we may contract to provide special servicing activities for these CMBS trusts, or, as holder of the controlling class, we may have the right to name and remove the special servicer for these trusts. In our role as special servicer, we provide services on defaulted loans within the trusts, such as foreclosure or work-out procedures, as permitted by the underlying contractual agreements. In exchange for these services, we receive a fee. These rights give us the ability to direct activities that could significantly impact the trust’s economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove us as special servicer, we do not have the power to direct activities that most significantly impact the trust’s economic performance. We evaluated all of our positions in such investments for consolidation.

 

For VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, an allocable portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding allocable amortization or change in fair value of the servicing intangible asset, are also eliminated in consolidation.

 

We perform ongoing reassessments of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion regarding the VIE to change.

 

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We separately present the assets and liabilities of our consolidated VIEs as individual line items on our consolidated balance sheets.  The assets of consolidated VIEs consist of loans and foreclosed loans which have been temporarily converted into real estate owned.  These assets are presented in the aggregate because they are similar in nature and can only be used to settle the obligations of the consolidated VIEs.  There is no recourse to the general credit of the Company for the obligations of our consolidated VIEs. 

 

We elect the fair value option for initial and subsequent recognition of the assets and liabilities of our consolidated VIEs.  Interest income and interest expense associated with these VIEs are no longer relevant on a standalone basis because these amounts are already reflected in the fair value changes.  We have elected to present these items in a single line on our condensed consolidated statements of operations.  The residual difference shown on our condensed consolidated statements of operations in the line item “Income of consolidated VIEs, net” represents our beneficial interest in the VIEs.

 

Convertible Senior Notes

 

ASC 470, Debt, requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. ASC 470-20 requires that the initial proceeds from the sale of these notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Company at such time. The equity components of the convertible notes have been reflected within additional paid-in capital in our condensed consolidated balance sheets. The resulting debt discount is being amortized over the period during which the convertible notes are expected to be outstanding (the maturity date) as additional non-cash interest expense.

 

Upon repurchase of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement consideration inclusive of transaction costs amongst the liability and equity components of the instrument based on the fair value of the liability component immediately prior to repurchase.  The difference between the settlement consideration allocated to the liability component and the net carrying value of the liability component including unamortized debt issuance costs is recognized as gain (loss) on debt extinguishment in our condensed consolidated statements of operations.  The remaining settlement consideration allocated to the equity component is recognized as a reduction of additional paid-in capital in our condensed consolidated balance sheets. 

 

Discontinued Operations

 

On January 31, 2014, we completed the spin-off of our former SFR segment to our stockholders as discussed in Note 1.  In accordance with ASC 205, Presentation of Financial Statements, the results of the SFR segment are presented within discontinued operations in our condensed consolidated statements of operations for the three months ended March 31, 2014.

 

Fair Value Option

 

The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.

 

We have elected the fair value option for eligible financial assets and liabilities of our consolidated VIEs, loans held-for-sale originated by the Investing and Servicing Segment’s conduit platform, purchased CMBS issued by VIEs we could consolidate in the future and certain investments in marketable equity securities. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for

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mortgage loans held-for-sale originated by the Investing and Servicing Segment’s conduit platform were made due to the short-term nature of these instruments. The fair value elections for investments in marketable equity securities were made because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market.

 

Fair Value Measurements

 

We measure our mortgage‑backed securities, derivative assets and liabilities, domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

 

As discussed above, we measure the assets and liabilities of consolidated VIEs at fair value pursuant to our election of the fair value option. The VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the VIE, we maximize the use of observable inputs over unobservable inputs. We also acknowledge that our principal market for selling CMBS assets is the securitization market where the market participant is considered to be a CMBS trust or a collateralized debt obligation (“CDO”). This methodology results in the fair value of the assets of a static CMBS trust being equal to the fair value of its liabilities. Refer to Note 18 for further information regarding our fair value measurements.

 

Loans Receivable and Provision for Loan Losses

 

In our Lending Segment we purchase and originate commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost. We are required to periodically evaluate each of these loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is determined to be impaired, we write down the loan through a charge to the provision for loan losses. Actual losses, if any, could ultimately differ from these estimates.

 

We perform a quarterly review of our portfolio of loans. In connection with this review, we assess the performance of each loan and assign a risk rating based on several factors including risk of loss, loan-to-value ratio, or LTV, collateral performance, structure, exit plan, and sponsorship. Loans are rated “1” through “5”, from less risk to greater risk in connection with this review.

 

Earnings Per Share

 

We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements.  Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) contingently issuable shares to our Manager; and (iii) the “in-the-money” conversion options associated with our outstanding convertible notes (see further discussion in Note 16). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

 

The Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities.  Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities.  For the three months ended March 31, 2015 and 2014, the two-class method resulted in the most dilutive EPS calculation.

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Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our loans, investment securities and intangible assets, which has a significant impact on the amounts of interest income, credit losses (if any), and fair values that we record and/or disclose. In addition, the fair value of financial assets and liabilities that are estimated using a discounted cash flows method is significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.

 

Recent Accounting Developments

 

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts.  The ASU is effective for the first interim or annual period beginning after December 15, 2016. Early application is not permitted.  We do not expect the application of this ASU to materially impact the Company.

 

On February 18, 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, which amends the criteria for determining which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2015. Early application is permitted. We are in the process of assessing what impact this ASU will have on the Company. 

 

On April 7, 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), which requires entities to present debt issuance costs as a direct deduction from the carrying value of the related debt liability, consistent with debt discounts, rather than as a separate deferred asset as the previous guidance required.  The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2015.  We do not expect the application of this ASU to materially impact the Company.

 

3.  Acquisitions and Divestitures

 

SFR Spin-off

 

As described in Note 1, on January 31, 2014, we completed the spin-off of our former SFR segment to our stockholders.  The results of operations for the SFR segment are presented within discontinued operations in our condensed consolidated statement of operations for the three months ended March 31, 2014. We have no continuing involvement with the SFR segment following the spin-off.  Subsequent to the spin-off, SWAY entered into a management agreement with an affiliate of our Manager. The following table presents the summarized consolidated results of discontinued operations for the SFR segment prior to the spin-off (in thousands):

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

March 31, 2014

 

Total revenues

 

$

3,876 

 

Total costs and expenses

 

 

6,369 

 

Loss before other income and income taxes 

 

 

(2,493)

 

Total other income

 

 

942 

 

Loss before income taxes 

 

 

(1,551)

 

Income tax provision

 

 

 —

 

Net loss 

 

$

(1,551)

 

 

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Ireland Portfolio Acquisition

 

In March 2015, we entered into agreements to acquire a portfolio of nine office properties and one multi-family residential property all located in Dublin, Ireland.  The completion of the acquisition is subject to our entrance into definitive agreements to acquire three additional office properties also located in Dublin.  The aggregate purchase price for all 13 properties, which collectively comprise approximately 630,000 square feet, is approximately €452.5 million.  The acquisitions are subject to customary closing conditions. 

 

Divestiture of Commercial Real Estate

 

In March 2015, we sold an operating property that we had previously acquired from a CMBS trust.  The sale resulted in a $17.1 million gain, which is included in gain on sale of investments and other assets in our condensed consolidated statement of operations for the three months ended March 31, 2015.

 

4. Loans

 

Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following tables summarize our investments in mortgages and loans by subordination class as of March 31, 2015 and December 31, 2014 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

    

Weighted

 

 

 

 

 

 

 

 

Weighted

 

Average Life

 

 

Carrying

 

Face

 

Average

 

(“WAL”)

March 31, 2015

 

Value

 

Amount

 

Coupon

 

(years)(2)

First mortgages

 

$

4,008,607 

 

$

4,073,852 

 

5.2 

%  

3.6 

Subordinated mortgages(1)

 

 

325,172 

 

 

353,614 

 

7.9 

%  

3.8 

Mezzanine loans

 

 

1,713,394 

 

 

1,707,767 

 

10.2 

%  

3.3 

Total loans held-for-investment

 

 

6,047,173 

 

 

6,135,233 

 

 

 

 

Loans held-for-sale, fair value option elected

 

 

343,770 

 

 

338,795 

 

4.4 

%  

9.3 

Loans transferred as secured borrowings

 

 

95,000 

 

 

95,000 

 

6.0 

%  

2.3 

Total gross loans

 

 

6,485,943 

 

 

6,569,028 

 

 

 

 

Loan loss allowance (loans held-for-investment)

 

 

(6,348)

 

 

 —

 

 

 

 

Total net loans

 

$

6,479,595 

 

$

6,569,028 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

First mortgages

 

$

3,834,700 

 

$

3,898,021 

 

5.4 

%  

3.6 

Subordinated mortgages(1)

 

 

345,091 

 

 

374,859 

 

8.1 

%  

3.9 

Mezzanine loans

 

 

1,605,478 

 

 

1,601,453 

 

10.3 

%  

3.0 

Total loans held-for-investment

 

 

5,785,269 

 

 

5,874,333 

 

 

 

 

Loans held-for-sale, fair value option elected

 

 

391,620 

 

 

390,342 

 

4.5 

%  

8.3 

Loans transferred as secured borrowings

 

 

129,427 

 

 

129,570 

 

5.4 

%  

2.5 

Total gross loans

 

 

6,306,316 

 

 

6,394,245 

 

 

 

 

Loan loss allowance (loans held-for-investment)

 

 

(6,031)

 

 

 —

 

 

 

 

Total net loans

 

$

6,300,285 

 

$

6,394,245 

 

 

 

 


(1)

Subordinated mortgages include B-notes and junior participation in first mortgages where we do not own the senior A-note or senior participation. If we own both the A-note and B-note, we categorize the loan as a first mortgage loan.

 

(2)

Represents the WAL of each respective group of loans as of the respective balance sheet date. The WAL of each individual loan is calculated using amounts and timing of future principal payments, as projected at origination.

 

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Table of Contents 

As of March 31, 2015, approximately $4.9 billion, or 80.4%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.9%. The following table summarizes our investments in floating rate loans (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2015

 

December 31, 2014

 

 

    

 

    

Carrying

    

 

    

Carrying

 

Index

 

Base Rate

 

Value

 

Base Rate

 

Value

 

1 Month LIBOR USD

 

0.1763 

%

$

337,566 

 

0.1713 

%

$

138,576 

 

3 Month LIBOR GBP

 

0.5696 

%

 

401,221 

 

0.5640 

%

 

440,222 

 

LIBOR floor

 

0.15 - 3.00

% (1)  

 

4,120,753 

 

0.15 - 3.00

% (1)  

 

3,889,412 

 

Total

 

 

 

$

4,859,540 

 

 

 

$

4,468,210 

 


(1)

The weighted-average LIBOR Floor was 0.32% and 0.35% as of March 31, 2015 and December 31, 2014, respectively.

 

Our loans are typically collateralized by real estate. As a result, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and discussions with market participants.

 

Our evaluation process as described above produces an internal risk rating between 1 and 5, which is a weighted average of the numerical ratings in the following categories: (i) sponsor capability and financial condition, (ii) loan and collateral performance relative to underwriting, (iii) quality and stability of collateral cash flows, and (iv) loan structure. We utilize the overall risk ratings as a concise means to monitor any credit migration on a loan as well as on the whole portfolio. While the overall risk rating is generally not the sole factor we use in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment, and therefore would be more likely to experience a credit loss.

 

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Table of Contents 

The rating categories generally include the characteristics described below, but these are utilized as guidelines and therefore not every loan will have all of the characteristics described in each category:

 

 

 

 

Rating

 

Characteristics

1

    

Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.

 

 

Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.

 

 

Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.

 

 

Loan structure—Loan‑to‑collateral value ratio (“LTV”) does not exceed 65%. The loan has structural features that enhance the credit profile.

 

 

 

 

2

 

Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.

 

 

Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.

 

 

Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.

 

 

Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.

 

 

 

 

3

 

Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.

 

 

Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.

 

 

Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.

 

 

Loan structure—LTV does not exceed 80%.

 

 

 

 

4

 

Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.

 

 

Loan collateral and performance relative to underwriting—