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 June 30, 2016

 

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) 422-7700

 


 

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 July 29, 2016 was 238,048,384.

 

 

 

 

 

 


 

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, 2015, this Quarterly Report on Form 10-Q and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, 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 or in which we invest;

 

·

availability of mortgage origination and acquisition opportunities acceptable to us;

 

·

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

17 

 

Note 4 Loans

19 

 

Note 5 Investment Securities

23 

 

Note 6 Properties

28 

 

Note 7 Investment in Unconsolidated Entities

28 

 

Note 8 Goodwill and Intangible Assets

29 

 

Note 9 Secured Financing Agreements

31 

 

Note 10 Convertible Senior Notes

34 

 

Note 11 Loan Securitization/Sale Activities

35 

 

Note 12 Derivatives and Hedging Activity

36 

 

Note 13 Offsetting Assets and Liabilities

39 

 

Note 14 Variable Interest Entities

39 

 

Note 15 Related-Party Transactions

41 

 

Note 16 Stockholders’ Equity

43 

 

Note 17 Earnings per Share

44 

 

Note 18 Accumulated Other Comprehensive Income

45 

 

Note 19 Fair Value

46 

 

Note 20 Income Taxes

51 

 

Note 21 Commitments and Contingencies

51 

 

Note 22 Segment Data

52 

 

Note 23 Subsequent Events

58 

Item 2. 

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

59 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

86 

Item 4. 

Controls and Procedures

88 

Part II 

Other Information

 

Item 1. 

Legal Proceedings

89 

Item 1A. 

Risk Factors

89 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

90 

Item 3. 

Defaults Upon Senior Securities

90 

Item 4. 

Mine Safety Disclosures

90 

Item 5. 

Other Information

90 

Item 6. 

Exhibits

92 

 

 

 

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

 

    

June 30, 2016

    

December 31, 2015

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

404,820

 

$

368,815

Restricted cash

 

 

41,131

 

 

23,069

Loans held-for-investment, net

 

 

5,693,452

 

 

5,973,079

Loans held-for-sale, at fair value

 

 

237,106

 

 

203,865

Loans transferred as secured borrowings

 

 

93,268

 

 

86,573

Investment securities ($378,461 and $403,703 held at fair value)

 

 

898,803

 

 

724,947

Properties, net

 

 

1,232,855

 

 

919,225

Intangible assets ($83,301 and $119,698 held at fair value)

 

 

177,053

 

 

201,570

Investment in unconsolidated entities

 

 

200,541

 

 

199,201

Goodwill

 

 

140,437

 

 

140,437

Derivative assets

 

 

42,692

 

 

45,091

Accrued interest receivable

 

 

30,036

 

 

34,314

Other assets

 

 

118,050

 

 

102,479

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

 

 

80,076,117

 

 

76,675,689

Total Assets 

 

$

89,386,361

 

$

85,698,354

Liabilities and Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

140,612

 

$

156,805

Related-party payable

 

 

20,318

 

 

40,955

Dividends payable

 

 

115,013

 

 

114,947

Derivative liabilities

 

 

17,870

 

 

5,196

Secured financing agreements, net

 

 

4,476,221

 

 

3,980,699

Convertible senior notes, net

 

 

1,334,424

 

 

1,323,795

Secured borrowings on transferred loans

 

 

94,668

 

 

88,000

VIE liabilities, at fair value

 

 

79,087,142

 

 

75,817,014

Total Liabilities 

 

 

85,286,268

 

 

81,527,411

Commitments and contingencies (Note 21)

 

 

 

 

 

 

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, 242,653,861 issued and 238,046,976 outstanding as of June 30, 2016 and 241,044,775 issued and 237,490,779 outstanding as of December 31, 2015

 

 

2,427

 

 

2,410

Additional paid-in capital

 

 

4,220,887

 

 

4,192,844

Treasury stock (4,606,885 shares and 3,553,996 shares)

 

 

(92,104)

 

 

(72,381)

Accumulated other comprehensive income

 

 

32,627

 

 

29,729

Accumulated deficit

 

 

(103,373)

 

 

(12,286)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,060,464

 

 

4,140,316

Non-controlling interests in consolidated subsidiaries

 

 

39,629

 

 

30,627

Total Equity 

 

 

4,100,093

 

 

4,170,943

Total Liabilities and Equity 

 

$

89,386,361

 

$

85,698,354

 

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

 

For the Six Months Ended

 

 

June 30,

 

June 30,

 

    

2016

    

2015

    

2016

    

2015

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

 

$

122,557

 

$

118,292

 

$

240,089

 

$

236,721

Interest income from investment securities

 

 

15,301

 

 

23,810

 

 

34,704

 

 

51,554

Servicing fees

 

 

23,312

 

 

30,154

 

 

48,003

 

 

58,411

Rental income

 

 

37,843

 

 

5,014

 

 

70,520

 

 

7,686

Other revenues

 

 

979

 

 

1,390

 

 

2,169

 

 

3,137

Total revenues 

 

 

199,992

 

 

178,660

 

 

395,485

 

 

357,509

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

23,767

 

 

26,821

 

 

48,730

 

 

54,789

Interest expense

 

 

57,635

 

 

49,799

 

 

114,155

 

 

100,333

General and administrative

 

 

35,409

 

 

41,404

 

 

68,207

 

 

76,668

Acquisition and investment pursuit costs

 

 

2,888

 

 

4,867

 

 

4,173

 

 

6,053

Costs of rental operations

 

 

15,852

 

 

1,211

 

 

28,507

 

 

2,909

Depreciation and amortization

 

 

19,073

 

 

5,828

 

 

37,833

 

 

9,913

Loan loss allowance, net

 

 

2,029

 

 

2,661

 

 

1,268

 

 

2,978

Other expense

 

 

 —

 

 

 —

 

 

100

 

 

375

Total costs and expenses 

 

 

156,653

 

 

132,591

 

 

302,973

 

 

254,018

Income before other income (loss), income taxes and non-controlling interests

 

 

43,339

 

 

46,069

 

 

92,512

 

 

103,491

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

50,707

 

 

55,873

 

 

46,540

 

 

103,734

Change in fair value of servicing rights

 

 

(12,191)

 

 

(2,652)

 

 

(18,930)

 

 

(4,194)

Change in fair value of investment securities, net

 

 

1,319

 

 

1,446

 

 

2,072

 

 

947

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

 

 

13,235

 

 

10,831

 

 

20,126

 

 

31,962

Earnings from unconsolidated entities

 

 

4,479

 

 

8,951

 

 

8,544

 

 

15,041

(Loss) gain on sale of investments and other assets, net

 

 

(90)

 

 

209

 

 

155

 

 

17,407

Gain (loss) on derivative financial instruments, net

 

 

20,253

 

 

(19,530)

 

 

(4,465)

 

 

5,093

Foreign currency (loss) gain, net

 

 

(16,988)

 

 

20,854

 

 

(17,366)

 

 

(9,453)

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

 

 

 —

 

 

 —

 

 

(54)

 

 

 —

Noncredit portion of OTTI recognized in other comprehensive income

 

 

 —

 

 

 —

 

 

54

 

 

 —

Net impairment losses recognized in earnings

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Loss on extinguishment of debt

 

 

 —

 

 

(629)

 

 

 —

 

 

(5,921)

Other income, net

 

 

8,714

 

 

10

 

 

10,729

 

 

55

Total other income (loss) 

 

 

69,438

 

 

75,363

 

 

47,405

 

 

154,671

Income before income taxes 

 

 

112,777

 

 

121,432

 

 

139,917

 

 

258,162

Income tax provision

 

 

(706)

 

 

(3,792)

 

 

(800)

 

 

(19,743)

Net income 

 

 

112,071

 

 

117,640

 

 

139,117

 

 

238,419

Net income attributable to non-controlling interests

 

 

(598)

 

 

(492)

 

 

(987)

 

 

(908)

Net income attributable to Starwood Property Trust, Inc.  

 

$

111,473

 

$

117,148

 

$

138,130

 

$

237,511

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.47

 

$

0.49

 

$

0.58

 

$

1.03

Diluted

 

$

0.47

 

$

0.49

 

$

0.58

 

$

1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.48

 

$

0.48

 

$

0.96

 

$

0.96

 

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

    

For the Six Months Ended

 

 

June 30,

 

June 30,

 

    

2016

    

2015

    

2016

    

2015

Net income 

 

$

112,071

 

$

117,640

 

$

139,117

 

$

238,419

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

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

(48)

 

 

123

 

 

(321)

 

 

(140)

Available-for-sale securities

 

 

5,951

 

 

(1,857)

 

 

2,551

 

 

(9,820)

Foreign currency remeasurement

 

 

(6,733)

 

 

8,273

 

 

668

 

 

(35)

Other comprehensive (loss) gain

 

 

(830)

 

 

6,539

 

 

2,898

 

 

(9,995)

Comprehensive income 

 

 

111,241

 

 

124,179

 

 

142,015

 

 

228,424

Less: Comprehensive income attributable to non-controlling interests

 

 

(598)

 

 

(492)

 

 

(987)

 

 

(908)

Comprehensive income attributable to Starwood Property Trust, Inc.  

 

$

110,643

 

$

123,687

 

$

141,028

 

$

227,516

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Starwood

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated

 

Accumulated

 

Property

 

 

 

 

 

 

 

 

 

Common stock

 

Additional

 

 

 

 

 

 

Deficit)

 

Other

 

Trust, Inc.

 

Non-

 

 

 

 

 

 

 

 

Par

 

Paid-in

 

Treasury Stock

 

Retained

 

Comprehensive

 

Stockholders’

 

Controlling

 

Total

 

 

    

Shares

    

Value

    

Capital

    

Shares

    

Amount

    

Earnings

    

Income

    

Equity

    

Interests

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2016

 

241,044,775

 

$

2,410

 

$

4,192,844

 

3,553,996

 

$

(72,381)

 

$

(12,286)

 

$

29,729

 

$

4,140,316

 

$

30,627

 

$

4,170,943

 

Proceeds from DRIP Plan

 

9,163

 

 

 —

 

 

177

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

177

 

 

 —

 

 

177

 

Common stock repurchased

 

 —

 

 

 —

 

 

 —

 

1,052,889

 

 

(19,723)

 

 

 —

 

 

 —

 

 

(19,723)

 

 

 —

 

 

(19,723)

 

Share-based compensation

 

876,674

 

 

9

 

 

14,651

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,660

 

 

 —

 

 

14,660

 

Manager incentive fee paid in stock

 

723,249

 

 

8

 

 

13,215

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,223

 

 

 —

 

 

13,223

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

138,130

 

 

 —

 

 

138,130

 

 

987

 

 

139,117

 

Dividends declared, $0.96 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(229,217)

 

 

 —

 

 

(229,217)

 

 

 —

 

 

(229,217)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,898

 

 

2,898

 

 

 —

 

 

2,898

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(52)

 

 

(52)

 

Contributions from non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,417

 

 

10,417

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,350)

 

 

(2,350)

 

Balance, June 30, 2016

 

242,653,861

 

$

2,427

 

$

4,220,887

 

4,606,885

 

$

(92,104)

 

$

(103,373)

 

$

32,627

 

$

4,060,464

 

$

39,629

 

$

4,100,093

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 public offering of common stock

 

13,800,000

 

 

138

 

 

326,004

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

326,142

 

 

 —

 

 

326,142

 

Proceeds from DRIP Plan

 

6,404

 

 

 —

 

 

154

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

154

 

 

 —

 

 

154

 

Equity offering costs

 

 —

 

 

 —

 

 

(892)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(892)

 

 

 —

 

 

(892)

 

Common stock repurchased

 

 —

 

 

 —

 

 

 —

 

400,000

 

 

(8,829)

 

 

 —

 

 

 —

 

 

(8,829)

 

 

 —

 

 

(8,829)

 

Equity component of 4.0% Convertible Senior Notes repurchase

 

 —

 

 

 —

 

 

(17,727)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,727)

 

 

 —

 

 

(17,727)

 

Share-based compensation

 

1,112,157

 

 

11

 

 

17,871

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

17,882

 

 

 —

 

 

17,882

 

Manager incentive fee paid in stock

 

523,560

 

 

5

 

 

12,734

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,739

 

 

 —

 

 

12,739

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

237,511

 

 

 —

 

 

237,511

 

 

908

 

 

238,419

 

Dividends declared, $0.96 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(224,010)

 

 

 —

 

 

(224,010)

 

 

 —

 

 

(224,010)

 

Other comprehensive loss, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(9,995)

 

 

(9,995)

 

 

 —

 

 

(9,995)

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,045

 

 

1,045

 

Contributions from non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,077

 

 

2,077

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(792)

 

 

(792)

 

Balance, June 30, 2015

 

240,194,174

 

$

2,402

 

$

4,173,869

 

1,613,750

 

$

(32,464)

 

$

4,123

 

$

45,901

 

$

4,193,831

 

$

25,294

 

$

4,219,125

 

 

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 Six Months Ended

 

 

June 30,

 

    

2016

    

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

139,117

 

$

238,419

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

 

 

 

 

 

 

Amortization of deferred financing costs, premiums and discounts on secured financing agreements

 

 

8,212

 

 

7,159

Amortization of convertible debt discount and deferred costs

 

 

10,628

 

 

10,503

Accretion of net discount on investment securities

 

 

(7,349)

 

 

(16,314)

Accretion of net deferred loan fees and discounts

 

 

(23,362)

 

 

(18,139)

Amortization of net discount from secured borrowings on transferred loans

 

 

 —

 

 

4

Share-based compensation

 

 

14,660

 

 

17,882

Share-based component of incentive fees

 

 

13,223

 

 

12,739

Change in fair value of fair value option investment securities

 

 

(2,072)

 

 

(947)

Change in fair value of consolidated VIEs

 

 

45,899

 

 

3,663

Change in fair value of servicing rights

 

 

18,930

 

 

4,194

Change in fair value of loans held-for-sale

 

 

(20,126)

 

 

(31,962)

Change in fair value of derivatives

 

 

2,332

 

 

(8,782)

Foreign currency loss, net

 

 

17,169

 

 

9,659

Gain on sale of investments and other assets

 

 

(155)

 

 

(17,407)

Loan loss allowance, net

 

 

1,268

 

 

2,978

Depreciation and amortization

 

 

34,664

 

 

9,079

Earnings from unconsolidated entities

 

 

(8,544)

 

 

(15,041)

Distributions of earnings from unconsolidated entities

 

 

9,817

 

 

14,752

Bargain purchase gain

 

 

(8,406)

 

 

 —

Loss on extinguishment of debt

 

 

 —

 

 

5,921

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

 

 

(488,448)

 

 

(889,413)

Proceeds from sale of loans held-for-sale

 

 

475,333

 

 

1,033,644

Changes in operating assets and liabilities:

 

 

 

 

 

 

Related-party payable, net

 

 

(20,749)

 

 

(16,192)

Accrued and capitalized interest receivable, less purchased interest

 

 

(41,151)

 

 

(32,185)

Other assets

 

 

6,715

 

 

(11,452)

Accounts payable, accrued expenses and other liabilities

 

 

(29,055)

 

 

(17,810)

Net cash provided by operating activities

 

 

148,550

 

 

294,952

Cash Flows from Investing Activities:

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(997,421)

 

 

(1,256,784)

Proceeds from principal collections on loans

 

 

1,193,643

 

 

698,901

Proceeds from loans sold

 

 

121,276

 

 

378,576

Purchase of investment securities

 

 

(350,642)

 

 

(147,423)

Proceeds from sales of investment securities

 

 

1,269

 

 

5,098

Proceeds from principal collections on investment securities

 

 

47,544

 

 

247,774

Real estate business combinations, net of cash acquired

 

 

(91,186)

 

 

(95,891)

Proceeds from sale of properties

 

 

 —

 

 

33,056

Purchase of other assets

 

 

(5,521)

 

 

 —

Investment in unconsolidated entities

 

 

(3,854)

 

 

(32,065)

Distribution of capital from unconsolidated entities

 

 

1,244

 

 

22,127

Payments for purchase or termination of derivatives

 

 

(15,144)

 

 

(13,894)

Proceeds from termination of derivatives

 

 

27,447

 

 

24,782

Return of investment basis in purchased derivative asset

 

 

137

 

 

177

(Increase) decrease in restricted cash, net

 

 

(17,840)

 

 

16,090

Net cash used in investing activities

 

 

(89,048)

 

 

(119,476)

 

See notes to condensed consolidated financial statements.

8


 

Table of Contents 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 30,

 

    

2016

    

2015

Cash Flows from Financing Activities:

 

 

 

 

 

 

Borrowings under financing agreements

 

$

2,059,599

 

$

2,464,018

Principal repayments on and repurchases of borrowings

 

 

(1,711,117)

 

 

(2,445,916)

Payment of deferred financing costs

 

 

(6,437)

 

 

(7,054)

Proceeds from common stock issuances

 

 

177

 

 

326,296

Payment of equity offering costs

 

 

 —

 

 

(892)

Payment of dividends

 

 

(229,151)

 

 

(216,623)

Contributions from non-controlling interests

 

 

10,417

 

 

 —

Distributions to non-controlling interests

 

 

(2,350)

 

 

(792)

Purchase of treasury stock

 

 

(19,723)

 

 

(2,268)

Issuance of debt of consolidated VIEs

 

 

596

 

 

7,513

Repayment of debt of consolidated VIEs

 

 

(147,523)

 

 

(120,529)

Distributions of cash from consolidated VIEs

 

 

22,986

 

 

14,584

Net cash (used in) provided by financing activities

 

 

(22,526)

 

 

18,337

Net increase in cash and cash equivalents

 

 

36,976

 

 

193,813

Cash and cash equivalents, beginning of period

 

 

368,815

 

 

255,187

Effect of exchange rate changes on cash

 

 

(971)

 

 

(2,522)

Cash and cash equivalents, end of period

 

$

404,820

 

$

446,478

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

91,961

 

$

81,208

Income taxes paid

 

 

2,177

 

 

17,663

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Fair value of assets acquired, net of cash

 

$

270,021

 

$

393,774

Fair value of liabilities assumed

 

 

170,429

 

 

297,883

Net assets acquired from consolidated VIEs

 

 

102,976

 

 

31,309

Unsettled common stock repurchased

 

 

 —

 

 

6,561

Dividends declared, but not yet paid

 

 

115,013

 

 

115,575

Consolidation of VIEs (VIE asset/liability additions)

 

 

16,850,221

 

 

5,657,627

Deconsolidation of VIEs (VIE asset/liability reductions)

 

 

5,126,980

 

 

3,481,363

 

See notes to condensed consolidated financial statements.

 

9


 

Table of Contents 

Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of June 30, 2016

(Unaudited)

 

1. Business and Organization

 

Starwood Property Trust, Inc. (“STWD” and, 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 investments in both the U.S. and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, 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 three reportable business segments as of June 30, 2016:

 

·

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, including properties acquired from CMBS trusts. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

 

·

Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multi-family properties, that are held for investment.

 

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 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.

 

10


 

Table of Contents 

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 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 22 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, 2015 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2016 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 quarterly, (ii) we view as critical, or (iii) became significant since December 31, 2015 due to a corporate action or increase in the significance of the underlying business activity.

 

Variable Interest Entities