Edgar Filing: STARWOOD PROPERTY TRUST, INC.

stwd_Current folio_10Q

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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 September 30, 2016

☐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 October 27, 2016 was 238,411,267.

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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 Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 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.

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TABLE OF CONTENTS


		Page
Part I	Financial Information
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10
	Note 1 Business and Organization	10
	Note 2 Summary of Significant Accounting Policies	11
	Note 3 Acquisitions	18
	Note 4 Loans	20
	Note 5 Investment Securities	25
	Note 6 Properties	30
	Note 7 Investment in Unconsolidated Entities	30
	Note 8 Goodwill and Intangible Assets	31
	Note 9 Secured Financing Agreements	33
	Note 10 Convertible Senior Notes	36
	Note 11 Loan Securitization/Sale Activities	37
	Note 12 Derivatives and Hedging Activity	38
	Note 13 Offsetting Assets and Liabilities	41
	Note 14 Variable Interest Entities	41
	Note 15 Related-Party Transactions	43
	Note 16 Stockholders’ Equity	45
	Note 17 Earnings per Share	46
	Note 18 Accumulated Other Comprehensive Income	47
	Note 19 Fair Value	48
	Note 20 Income Taxes	52
	Note 21 Commitments and Contingencies	52
	Note 22 Segment Data	53
	Note 23 Subsequent Events	59
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	60
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	87
Item 4.	Controls and Procedures	90
Part II	Other Information
Item 1.	Legal Proceedings	91
Item 1A.	Risk Factors	91
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	91
Item 3.	Defaults Upon Senior Securities	91
Item 4.	Mine Safety Disclosures	91
Item 5.	Other Information	91
Item 6.	Exhibits	93

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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
	September 30, 2016		December 31, 2015
Assets:
Cash and cash equivalents	$	501,557	$	368,815
Restricted cash		51,735		23,069
Loans held-for-investment, net		5,232,231		5,973,079
Loans held-for-sale, at fair value		347,490		203,865
Loans transferred as secured borrowings		100,978		86,573
Investment securities ($332,047 and $403,703 held at fair value)		854,667		724,947
Properties, net		1,237,879		919,225
Intangible assets ($69,018 and $119,698 held at fair value)		155,392		201,570
Investment in unconsolidated entities		185,748		199,201
Goodwill		140,437		140,437
Derivative assets		34,309		45,091
Accrued interest receivable		26,744		34,314
Other assets		128,292		102,479
Variable interest entity (“VIE”) assets, at fair value		73,923,699		76,675,689
Total Assets	$	82,921,158	$	85,698,354
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	174,124	$	156,805
Related-party payable		23,901		40,955
Dividends payable		115,190		114,947
Derivative liabilities		12,753		5,196
Secured financing agreements, net		4,122,839		3,980,699
Convertible senior notes, net		1,339,853		1,323,795
Secured borrowings on transferred loans		102,365		88,000
VIE liabilities, at fair value		72,924,751		75,817,014
Total Liabilities		78,815,776		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, 242,995,917 issued and 238,389,032 outstanding as of September 30, 2016 and 241,044,775 issued and 237,490,779 outstanding as of December 31, 2015		2,430		2,410
Additional paid-in capital		4,230,577		4,192,844
Treasury stock (4,606,885 shares and 3,553,996 shares)		(92,104)		(72,381)
Accumulated other comprehensive income		40,248		29,729
Accumulated deficit		(112,303)		(12,286)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,068,848		4,140,316
Non-controlling interests in consolidated subsidiaries		36,534		30,627
Total Equity		4,105,382		4,170,943
Total Liabilities and Equity	$	82,921,158	$	85,698,354

See notes to condensed consolidated financial statements.

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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 Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Revenues:
Interest income from loans	$	121,225	$	120,598	$	361,314	$	357,319
Interest income from investment securities		19,175		24,674		53,879		76,228
Servicing fees		22,918		32,528		70,921		90,939
Rental income		39,742		10,045		110,262		17,731
Other revenues		1,645		4,300		3,814		7,437
Total revenues		204,705		192,145		600,190		549,654
Costs and expenses:
Management fees		27,780		28,082		76,510		82,871
Interest expense		59,082		50,688		173,237		151,021
General and administrative		51,470		38,693		119,677		115,361
Acquisition and investment pursuit costs		1,509		3,682		5,682		9,735
Costs of rental operations		18,011		2,352		46,518		5,261
Depreciation and amortization		15,352		7,234		53,185		17,147
Loan loss allowance, net		2,127		(2,667)		3,395		311
Other expense		—		3		100		378
Total costs and expenses		175,331		128,067		478,304		382,085
Income before other income, income taxes and non-controlling interests		29,374		64,078		121,886		167,569
Other income:
Change in net assets related to consolidated VIEs		47,848		49,665		94,388		153,399
Change in fair value of servicing rights		(14,283)		(4,217)		(33,213)		(8,411)
Change in fair value of investment securities, net		(2,786)		2,617		(714)		3,564
Change in fair value of mortgage loans held-for-sale, net		49,996		19,082		70,122		51,044
Earnings from unconsolidated entities		4,305		5,706		12,849		20,747
Gain on sale of investments and other assets, net		10		3,348		165		20,755
(Loss) gain on derivative financial instruments, net		(2,328)		2,230		(6,793)		7,323
Foreign currency loss, net		(3,214)		(17,782)		(20,580)		(27,235)
Total other-than-temporary impairment (“OTTI”)		(711)		—		(765)		—
Noncredit portion of OTTI recognized in other comprehensive income		—		—		54		—
Net impairment losses recognized in earnings		(711)		—		(711)		—
Loss on extinguishment of debt		—		—		—		(5,921)
Other income, net		269		64		10,998		119
Total other income		79,106		60,713		126,511		215,384
Income before income taxes		108,480		124,791		248,397		382,953
Income tax provision		(2,667)		(7,675)		(3,467)		(27,418)
Net income		105,813		117,116		244,930		355,535
Net income attributable to non-controlling interests		(47)		(381)		(1,034)		(1,289)
Net income attributable to Starwood Property Trust, Inc.	$	105,766	$	116,735	$	243,896	$	354,246

Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic	$	0.44	$	0.49	$	1.02	$	1.51
Diluted	$	0.44	$	0.49	$	1.00	$	1.51

Dividends declared per common share	$	0.48	$	0.48	$	1.44	$	1.44

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Net income	$	105,813	$	117,116	$	244,930	$	355,535
Other comprehensive income (loss) (net change by component):
Cash flow hedges		185		(208)		(136)		(348)
Available-for-sale securities		6,105		(9,095)		8,656		(18,915)
Foreign currency remeasurement		1,331		2,912		1,999		2,877
Other comprehensive gain (loss)		7,621		(6,391)		10,519		(16,386)
Comprehensive income		113,434		110,725		255,449		339,149
Less: Comprehensive income attributable to non-controlling interests		(47)		(381)		(1,034)		(1,289)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	113,387	$	110,344	$	254,415	$	337,860

See notes to condensed consolidated financial statements.

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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	14,707		—		299	—		—		—		—		299		—		299
Common stock repurchased	—		—		—	1,052,889		(19,723)		—		—		(19,723)		—		(19,723)
Share-based compensation	1,147,975		12		22,785	—		—		—		—		22,797		—		22,797
Manager incentive fee paid in stock	788,460		8		14,649	—		—		—		—		14,657		—		14,657
Net income	—		—		—	—		—		243,896		—		243,896		1,034		244,930
Dividends declared, $1.44 per share	—		—		—	—		—		(343,913)		—		(343,913)		—		(343,913)
Other comprehensive income, net	—		—		—	—		—		—		10,519		10,519		—		10,519
VIE non-controlling interests	—		—		—	—		—		—		—		—		(144)		(144)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		10,417		10,417
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(5,400)		(5,400)
Balance, September 30, 2016	242,995,917	$	2,430	$	4,230,577	4,606,885	$	(92,104)	$	(112,303)	$	40,248	$	4,068,848	$	36,534	$	4,105,382

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	9,400		—		219	—		—		—		—		219		—		219
Equity offering costs	—		—		(945)	—		—		—		—		(945)		—		(945)
Common stock repurchased	—		—		—	1,793,223		(37,890)		—		—		(37,890)		—		(37,890)
Equity component of 4.0% Convertible Senior Notes repurchase	—		—		(17,727)	—		—		—		—		(17,727)		—		(17,727)
Share-based compensation	1,484,879		15		26,440	—		—		—		—		26,455		—		26,455
Manager incentive fee paid in stock	619,256		6		14,822	—		—		—		—		14,828		—		14,828
Net income	—		—		—	—		—		354,246		—		354,246		1,289		355,535
Dividends declared, $1.44 per share	—		—		—	—		—		(339,025)		—		(339,025)		—		(339,025)
Other comprehensive loss, net	—		—		—	—		—		—		(16,386)		(16,386)		—		(16,386)
VIE non-controlling interests	—		—		—	—		—		—		—		—		4,188		4,188
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		4,133		4,133
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(1,259)		(1,259)
Balance, September 30, 2015	240,665,588	$	2,407	$	4,184,538	3,006,973	$	(61,525)	$	5,843	$	39,510	$	4,170,773	$	30,407	$	4,201,180

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)


	For the Nine Months Ended
	September 30,
	2016		2015
Cash Flows from Operating Activities:
Net income	$	244,930	$	355,535
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs, premiums and discounts on secured financing agreements		12,061		11,055
Amortization of convertible debt discount and deferred costs		16,058		15,631
Accretion of net discount on investment securities		(11,967)		(20,312)
Accretion of net deferred loan fees and discounts		(38,809)		(26,615)
Amortization of net discount from secured borrowings on transferred loans		—		4
Share-based compensation		22,797		26,455
Share-based component of incentive fees		14,657		14,828
Change in fair value of fair value option investment securities		714		(3,564)
Change in fair value of consolidated VIEs		42,371		17,438
Change in fair value of servicing rights		33,213		8,411
Change in fair value of loans held-for-sale		(70,122)		(51,044)
Change in fair value of derivatives		3,360		(12,765)
Foreign currency loss, net		20,367		27,372
Gain on sale of investments and other assets		(165)		(20,755)
Other-than-temporary impairment		711		—
Loan loss allowance, net		3,395		311
Depreciation and amortization		49,081		15,873
Earnings from unconsolidated entities		(12,849)		(20,747)
Distributions of earnings from unconsolidated entities		15,151		18,665
Bargain purchase gain		(8,406)		—
Loss on extinguishment of debt		—		5,921
Origination and purchase of loans held-for-sale, net of principal collections		(1,186,080)		(1,424,837)
Proceeds from sale of loans held-for-sale		1,123,512		1,443,871
Changes in operating assets and liabilities:
Related-party payable, net		(17,166)		(17,947)
Accrued and capitalized interest receivable, less purchased interest		(58,275)		(48,310)
Other assets		6,168		(29,576)
Accounts payable, accrued expenses and other liabilities		(3,537)		(25,211)
Net cash provided by operating activities		201,170		259,687
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(1,583,628)		(1,670,124)
Proceeds from principal collections on loans		2,187,844		1,057,700
Proceeds from loans sold		236,433		599,504
Purchase of investment securities		(359,510)		(163,018)
Proceeds from sales of investment securities		3,799		6,301
Proceeds from principal collections on investment securities		70,316		348,090
Real estate business combinations, net of cash acquired		(91,186)		(239,933)
Proceeds from sale of properties		—		33,056
Additions to properties and other assets		(10,209)		(309)
Investment in unconsolidated entities		(3,870)		(32,063)
Distribution of capital from unconsolidated entities		15,026		29,003
Payments for purchase or termination of derivatives		(24,954)		(18,271)
Proceeds from termination of derivatives		37,652		30,194
Return of investment basis in purchased derivative asset		206		260
(Increase) decrease in restricted cash, net		(28,311)		9,404
Net cash provided by (used in) investing activities		449,608		(10,206)

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 Nine Months Ended
	September 30,
	2016		2015
Cash Flows from Financing Activities:
Borrowings under financing agreements	$	3,158,920	$	3,423,328
Principal repayments on and repurchases of borrowings		(3,138,534)		(3,289,937)
Payment of deferred financing costs		(17,799)		(13,876)
Proceeds from common stock issuances		299		326,361
Payment of equity offering costs		—		(945)
Payment of dividends		(343,670)		(332,023)
Contributions from non-controlling interests		10,417		—
Distributions to non-controlling interests		(5,400)		(1,259)
Purchase of treasury stock		(19,723)		(29,792)
Issuance of debt of consolidated VIEs		596		9,132
Repayment of debt of consolidated VIEs		(202,892)		(246,230)
Distributions of cash from consolidated VIEs		40,731