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, 2018

 

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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth 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)

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 April 30, 2018 was 261,986,337.

 

 

 

 

 


 

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, 2017 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 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

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 and Divestitures

17

 

Note 4 Loans

18

 

Note 5 Investment Securities

23

 

Note 6 Properties

26

 

Note 7 Investment in Unconsolidated Entities

28

 

Note 8 Goodwill and Intangibles

29

 

Note 9 Secured Financing Agreements

31

 

Note 10 Unsecured Senior Notes

34

 

Note 11 Loan Securitization/Sale Activities

36

 

Note 12 Derivatives and Hedging Activity

37

 

Note 13 Offsetting Assets and Liabilities

39

 

Note 14 Variable Interest Entities

39

 

Note 15 Related-Party Transactions

40

 

Note 16 Stockholders’ Equity and Non-Controlling Interests

42

 

Note 17 Earnings per Share

44

 

Note 18 Accumulated Other Comprehensive Income

45

 

Note 19 Fair Value

45

 

Note 20 Income Taxes

49

 

Note 21 Commitments and Contingencies

49

 

Note 22 Segment Data

49

 

Note 23 Subsequent Events

54

Item 2. 

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

55

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

76

Item 4. 

Controls and Procedures

79

Part II 

Other Information

 

Item 1. 

Legal Proceedings

80

Item 1A. 

Risk Factors

80

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3. 

Defaults Upon Senior Securities

80

Item 4. 

Mine Safety Disclosures

80

Item 5. 

Other Information

80

Item 6. 

Exhibits

81

 

 

 

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, 2018

    

December 31, 2017

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

286,155

 

$

369,448

Restricted cash

 

 

93,266

 

 

48,825

Loans held-for-investment, net

 

 

6,182,786

 

 

6,562,495

Loans held-for-sale, at fair value

 

 

723,733

 

 

745,743

Loans transferred as secured borrowings

 

 

74,463

 

 

74,403

Investment securities ($278,144 and $284,735 held at fair value)

 

 

514,463

 

 

718,203

Properties, net

 

 

2,988,864

 

 

2,647,481

Intangible assets ($24,945 and $30,759 held at fair value)

 

 

179,629

 

 

183,092

Investment in unconsolidated entities

 

 

160,112

 

 

185,503

Goodwill

 

 

140,437

 

 

140,437

Derivative assets

 

 

41,067

 

 

33,898

Accrued interest receivable

 

 

41,253

 

 

47,747

Other assets

 

 

467,320

 

 

138,140

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

 

 

49,233,307

 

 

51,045,874

Total Assets 

 

$

61,126,855

 

$

62,941,289

Liabilities and Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

157,563

 

$

185,117

Related-party payable

 

 

31,781

 

 

42,369

Dividends payable

 

 

126,244

 

 

125,916

Derivative liabilities

 

 

57,600

 

 

36,200

Secured financing agreements, net

 

 

5,554,314

 

 

5,773,056

Unsecured senior notes, net

 

 

2,252,631

 

 

2,125,235

Secured borrowings on transferred loans, net

 

 

74,275

 

 

74,185

VIE liabilities, at fair value

 

 

48,167,760

 

 

50,000,010

Total Liabilities 

 

 

56,422,168

 

 

58,362,088

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, 267,135,302 issued and 261,955,162 outstanding as of March 31, 2018 and 265,983,309  issued and 261,376,424 outstanding as of December 31, 2017

 

 

2,671

 

 

2,660

Additional paid-in capital

 

 

4,728,183

 

 

4,715,246

Treasury stock (5,180,140 shares and 4,606,885 shares)

 

 

(104,194)

 

 

(92,104)

Accumulated other comprehensive income

 

 

75,310

 

 

69,924

Accumulated deficit

 

 

(243,438)

 

 

(217,312)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,458,532

 

 

4,478,414

Non-controlling interests in consolidated subsidiaries

 

 

246,155

 

 

100,787

Total Equity 

 

 

4,704,687

 

 

4,579,201

Total Liabilities and Equity 

 

$

61,126,855

 

$

62,941,289

 

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,

 

    

2018

    

2017

Revenues:

 

 

 

 

 

 

Interest income from loans

 

$

137,620

 

$

111,883

Interest income from investment securities

 

 

15,269

 

 

15,224

Servicing fees

 

 

26,067

 

 

14,102

Rental income

 

 

81,110

 

 

57,042

Other revenues

 

 

521

 

 

469

Total revenues 

 

 

260,587

 

 

198,720

Costs and expenses:

 

 

 

 

 

 

Management fees

 

 

30,642

 

 

24,384

Interest expense

 

 

87,183

 

 

65,860

General and administrative

 

 

32,142

 

 

30,429

Acquisition and investment pursuit costs

 

 

377

 

 

671

Costs of rental operations

 

 

29,693

 

 

20,878

Depreciation and amortization

 

 

31,744

 

 

22,228

Loan loss allowance, net

 

 

1,538

 

 

(305)

Other expense

 

 

104

 

 

758

Total costs and expenses 

 

 

213,423

 

 

164,903

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

 

 

47,164

 

 

33,817

Other income (loss):

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

52,653

 

 

69,170

Change in fair value of servicing rights

 

 

(5,814)

 

 

(8,433)

Change in fair value of investment securities, net

 

 

(149)

 

 

(1,171)

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

 

 

7,800

 

 

10,593

(Loss) earnings from unconsolidated entities

 

 

(1,462)

 

 

2,987

Gain (loss) on sale of investments and other assets, net

 

 

10,660

 

 

(56)

Loss on derivative financial instruments, net

 

 

(16,859)

 

 

(4,349)

Foreign currency gain, net

 

 

13,549

 

 

4,864

Loss on extinguishment of debt

 

 

 —

 

 

(5,916)

Other income, net

 

 

108

 

 

365

Total other income

 

 

60,486

 

 

68,054

Income before income taxes

 

 

107,650

 

 

101,871

Income tax (provision) benefit

 

 

(2,856)

 

 

983

Net income 

 

 

104,794

 

 

102,854

Net income attributable to non-controlling interests

 

 

(4,862)

 

 

(496)

Net income attributable to Starwood Property Trust, Inc.  

 

$

99,932

 

$

102,358

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Basic

 

$

0.38

 

$

0.39

Diluted

 

$

0.38

 

$

0.39

 

 

 

 

 

 

 

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,

 

 

 

2018

 

2017

 

Net income 

 

$

104,794

 

$

102,854

 

Other comprehensive income (net change by component):

 

 

 

 

 

 

 

Cash flow hedges

 

 

 5

 

 

76

 

Available-for-sale securities

 

 

1,163

 

 

1,846

 

Foreign currency translation

 

 

4,218

 

 

2,007

 

Other comprehensive income

 

 

5,386

 

 

3,929

 

Comprehensive income 

 

 

110,180

 

 

106,783

 

Less: Comprehensive income attributable to non-controlling interests

 

 

(4,862)

 

 

(496)

 

Comprehensive income attributable to Starwood Property Trust, Inc.  

 

$

105,318

 

$

106,287

 

 

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

 

Property

 

 

 

 

 

 

 

 

 

Common stock

 

Additional

 

 

 

 

 

 

 

 

Other

 

Trust, Inc.

 

Non-

 

 

 

 

 

 

 

 

Par

 

Paid-in

 

Treasury Stock

 

Accumulated

 

Comprehensive

 

Stockholders’

 

Controlling

 

Total

 

 

    

Shares

    

Value

    

Capital

    

Shares

    

Amount

    

Deficit

    

Income

    

Equity

    

Interests

    

Equity

 

Balance, January 1, 2018

 

265,983,309

 

$

2,660

 

$

4,715,246

 

4,606,885

 

$

(92,104)

 

$

(217,312)

 

$

69,924

 

$

4,478,414

 

$

100,787

 

$

4,579,201

 

Proceeds from DRIP Plan

 

7,651

 

 

 —

 

 

159

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

159

 

 

 —

 

 

159

 

Common stock repurchased

 

 —

 

 

 —

 

 

 —

 

573,255

 

 

(12,090)

 

 

 —

 

 

 —

 

 

(12,090)

 

 

 —

 

 

(12,090)

 

Share-based compensation

 

598,701

 

 

 6

 

 

4,762

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,768

 

 

 —

 

 

4,768

 

Manager incentive fee paid in stock

 

545,641

 

 

 5

 

 

10,978

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,983

 

 

 —

 

 

10,983

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

99,932

 

 

 —

 

 

99,932

 

 

4,862

 

 

104,794

 

Dividends declared, $0.48 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 

 

 

(126,058)

 

 

 —

 

 

(126,058)

 

 

 —

 

 

(126,058)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,386

 

 

5,386

 

 

 —

 

 

5,386

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

569

 

 

569

 

Contributions from non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

366,691

 

 

366,691

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

(2,962)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,962)

 

 

(226,435)

 

 

(229,397)

 

Sale of controlling interest in majority owned property asset

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(319)

 

 

(319)

 

Balance, March 31, 2018

 

267,135,302

 

$

2,671

 

$

4,728,183

 

5,180,140

 

$

(104,194)

 

$

(243,438)

 

$

75,310

 

$

4,458,532

 

$

246,155

 

$

4,704,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

263,893,806

 

$

2,639

 

$

4,691,180

 

4,606,885

 

$

(92,104)

 

$

(115,579)

 

$

36,138

 

$

4,522,274

 

$

37,799

 

$

4,560,073

 

Proceeds from DRIP Plan

 

8,129

 

 

 —

 

 

183

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

183

 

 

 —

 

 

183

 

Equity offering costs

 

 —

 

 

 —

 

 

(12)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(12)

 

 

 —

 

 

(12)

 

Equity component of 2023 Convertible Senior Notes issuance

 

 —

 

 

 —

 

 

3,755

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,755

 

 

 —

 

 

3,755

 

Equity component of 2018 Convertible Senior Notes repurchase

 

 —

 

 

 —

 

 

(18,105)

 

 —

 

 

 —

 

 

 

 

 

 

 

 

(18,105)

 

 

 

 

 

(18,105)

 

Share-based compensation

 

514,379

 

 

 5

 

 

3,154

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,159

 

 

 —

 

 

3,159

 

Manager incentive fee paid in stock

 

418,016

 

 

 4

 

 

9,543

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,547

 

 

 —

 

 

9,547

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

102,358

 

 

 —

 

 

102,358

 

 

496

 

 

102,854

 

Dividends declared, $0.48 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(125,479)

 

 

 —

 

 

(125,479)

 

 

 —

 

 

(125,479)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,929

 

 

3,929

 

 

 —

 

 

3,929

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,177

 

 

5,177

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,726)

 

 

(1,726)

 

Balance, March 31, 2017

 

264,834,330

 

$

2,648

 

$

4,689,698

 

4,606,885

 

$

(92,104)

 

$

(138,700)

 

$

40,067

 

$

4,501,609

 

$

41,746

 

$

4,543,355

 

 

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,

 

    

2018

    

2017

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

104,794

 

$

102,854

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

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

 

 

5,167

 

 

4,686

Amortization of discounts and deferred financing costs on senior notes

 

 

3,869

 

 

6,093

Accretion of net discount on investment securities

 

 

(6,841)

 

 

(4,257)

Accretion of net deferred loan fees and discounts

 

 

(12,052)

 

 

(7,519)

Share-based compensation

 

 

4,768

 

 

3,159

Share-based component of incentive fees

 

 

10,983

 

 

9,547

Change in fair value of investment securities

 

 

149

 

 

1,171

Change in fair value of consolidated VIEs

 

 

(11,241)

 

 

(20,677)

Change in fair value of servicing rights

 

 

5,814

 

 

8,433

Change in fair value of loans held-for-sale

 

 

(7,800)

 

 

(10,593)

Change in fair value of derivatives

 

 

18,069

 

 

2,900

Foreign currency gain, net

 

 

(13,540)

 

 

(4,829)

(Gain) loss on sale of investments and other assets

 

 

(10,660)

 

 

56

Impairment charges

 

 

25

 

 

758

Loan loss allowance, net

 

 

1,538

 

 

(305)

Depreciation and amortization

 

 

31,412

 

 

21,297

Loss (earnings) from unconsolidated entities

 

 

1,462

 

 

(2,987)

Distributions of earnings from unconsolidated entities

 

 

2,675

 

 

2,643

Loss on extinguishment of debt

 

 

 —

 

 

5,916

Origination and purchase of loans held-for-sale, net of principal collections

 

 

(245,027)

 

 

(445,690)

Proceeds from sale of loans held-for-sale

 

 

266,632

 

 

179,296

Changes in operating assets and liabilities:

 

 

 

 

 

 

Related-party payable, net

 

 

(10,588)

 

 

(11,821)

Accrued and capitalized interest receivable, less purchased interest

 

 

(9,412)

 

 

(19,611)

Other assets

 

 

(6,188)

 

 

(1,855)

Accounts payable, accrued expenses and other liabilities

 

 

(31,612)

 

 

(14,686)

Net cash provided by (used in) operating activities

 

 

92,396

 

 

(196,021)

Cash Flows from Investing Activities:

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(900,937)

 

 

(621,135)

Proceeds from principal collections on loans

 

 

870,400

 

 

226,039

Proceeds from loans sold

 

 

145,273

 

 

37,079

Proceeds from sales of investment securities

 

 

 —

 

 

10,434

Proceeds from principal collections on investment securities

 

 

219,230

 

 

76,050

Proceeds from sale of properties

 

 

51,093

 

 

 —

Purchases and additions to properties and other assets

 

 

(7,056)

 

 

(2,435)

Distribution of capital from unconsolidated entities

 

 

21,255

 

 

3,127

Payments for purchase or termination of derivatives

 

 

(15,604)

 

 

(32,700)

Proceeds from termination of derivatives

 

 

11,773

 

 

17,331

Return of investment basis in purchased derivative asset

 

 

 —

 

 

62

Net cash provided by (used in) investing activities

 

 

395,427

 

 

(286,148)

 

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,

 

    

2018

    

2017

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from borrowings

 

$

1,515,241

 

$

1,205,691

Principal repayments on and repurchases of borrowings

 

 

(1,629,449)

 

 

(957,529)

Payment of deferred financing costs

 

 

(10,506)

 

 

(5,967)

Proceeds from common stock issuances

 

 

159

 

 

183

Payment of equity offering costs

 

 

 —

 

 

(647)

Payment of dividends

 

 

(125,730)

 

 

(124,506)

Contributions from non-controlling interests

 

 

310

 

 

 —

Distributions to non-controlling interests

 

 

(229,397)

 

 

(1,726)

Purchase of treasury stock

 

 

(12,090)

 

 

 —

Issuance of debt of consolidated VIEs

 

 

7,948

 

 

4,759

Repayment of debt of consolidated VIEs

 

 

(57,289)

 

 

(57,445)

Distributions of cash from consolidated VIEs

 

 

13,730

 

 

30,956

Net cash (used in) provided by financing activities 

 

 

(527,073)

 

 

93,769

Net decrease in cash, cash equivalents and restricted cash

 

 

(39,250)

 

 

(388,400)

Cash, cash equivalents and restricted cash, beginning of period

 

 

418,273

 

 

650,755

Effect of exchange rate changes on cash

 

 

398

 

 

179

Cash, cash equivalents and restricted cash, end of period

 

$

379,421

 

$

262,534

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

75,696

 

$

51,023

Income taxes paid

 

 

880

 

 

268

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Dividends declared, but not yet paid

 

$

126,058

 

$

125,479

Consolidation of VIEs (VIE asset/liability additions)

 

 

1,089,881

 

 

1,127,952

Deconsolidation of VIEs (VIE asset/liability reductions)

 

 

875,240

 

 

1,528,137

Net assets acquired from consolidated VIEs

 

 

27,737

 

 

 —

Contributions of Woodstar II Portfolio net assets from non-controlling interests

 

 

366,381

 

 

 —

Loan principal collections temporarily held at master servicer

 

 

326,362

 

 

 —

 

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, 2018

(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. 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 March 31, 2018:

 

·

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, certain residential mortgage loans, and other real estate and real estate-related debt investments in both the U.S. and Europe. 

 

·

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

 

·

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing business in the U.S. that manages and works 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”).

 

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.

 

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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, 2017 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2018 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, (iii) became significant since December 31, 2017 due to a corporate action or increase in the significance of the underlying business activity or (iv) changed upon adoption of an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”).

 

Variable Interest Entities

 

In addition to the Investing and Servicing Segment’s VIEs, certain other entities in which we hold interests are considered VIEs as the limited partners of these entities do not collectively possess (i) the right to remove the general partner without cause or (ii) the right to participate in significant decisions made by the partnership. 

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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: (i) identifying the activities that most significantly impact the VIE’s economic performance; and (ii) 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. The right to remove the decision maker in a VIE must be exercisable without cause for the decision maker to not be deemed the party that has 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 without cause, 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 securitization 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: (i) 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 (ii) 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 elect the fair value option for initial and subsequent recognition of the assets and liabilities of our consolidated securitization 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 “Change in net assets related to consolidated VIEs” represents our beneficial interest in the VIEs.

 

We separately present the assets and liabilities of our consolidated securitization VIEs as individual line items on our condensed consolidated balance sheets.  The liabilities of our consolidated securitization VIEs consist solely of obligations to the bondholders of the related CMBS trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our consolidated securitization VIEs consist principally of loans, but at times, also include foreclosed loans which have been temporarily converted into real estate owned (“REO”).  These assets in the aggregate are likewise presented as a single line item entitled “VIE assets.”

 

Loans comprise the vast majority of our securitization VIE assets and are carried at fair value due to the election of the fair value option.  When an asset becomes REO, it is due to nonperformance of the loan.  Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value.  Furthermore, when we consolidate a CMBS trust, any existing REO would be consolidated at fair value.  Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.

 

In addition to sharing a similar measurement method as the loans in a CMBS trust, the securitization VIE assets as a whole can only be used to settle the obligations of the consolidated VIE.  The assets of our securitization VIEs are not individually accessible by the bondholders, which creates inherent limitations from a valuation perspective.  Also creating limitations from a valuation perspective is our role as special servicer, which provides us very limited visibility, if any, into the performing loans of a CMBS trust.

 

REO assets generally represent a very small percentage of the overall asset pool of a CMBS trust.  In a new issue CMBS trust there are no REO assets.  We estimate that REO assets constitute approximately 3% of our consolidated securitization VIE assets, with the remaining 97% representing loans.  However, it is important to note that the fair value of our securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.  In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.    

 

Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as opposed to its fair value.  However, as a pool, the fair value of the assets in total is equal to the fair value of the liabilities. 

 

For these reasons, the assets of our securitization VIEs are presented in the aggregate.

 

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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 securitization VIEs, loans held-for-sale originated or acquired for future securitization, purchased CMBS issued by VIEs we could consolidate in the future and certain investments in marketable equity securities which, effective January 1, 2018, are now required to be carried at fair value through earnings. 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 mortgage loans held-for-sale were made due to the short-term nature of these instruments.

 

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 securitization VIEs at fair value pursuant to our election of the fair value option. The securitization 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 securitization VIE, we maximize the use of observable inputs over unobservable inputs. Refer to Note 19 for further discussion regarding our fair value measurements.

 

Loans Held-for-Investment and Provision for Loan Losses

 

Loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination costs as applicable, unless the loans are deemed impaired. We evaluate each loan classified as held-for-investment for impairment at least quarterly. In connection with this evaluation, we assess the performance of each loan and assign a risk rating based on several factors, including risk of loss, loan-to-collateral value ratio (“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.

 

Impairment occurs 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 considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Actual losses, if any, could ultimately differ from these estimates.

 

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Cost Method Equity Investments

 

On January 1, 2018, ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, became effective prospectively for public companies with a calendar fiscal year.  This ASU requires entities to carry all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures, and limited liability companies, at fair value with changes in fair value recognized within net income. This ASU does not apply to equity method investments, investments in Federal Home Loan Bank (“FHLB”) stock, investments that result in consolidation of the investee or investments in certain investment companies.  For investments in equity securities without a readily determinable fair value, an entity is permitted to elect a practicability exception, under which the investment will be measured at cost, less impairment, plus or minus observable price changes from orderly transactions of an identical or similar investment of the same issuer. 

 

Additionally, this ASU eliminated the requirement to assess whether an impairment of an equity investment is other than temporary. The impairment model for equity investments subject to this election is now a single-step model whereby an entity performs a qualitative assessment to identify impairment. If the qualitative assessment indicates that an impairment exists, the entity would estimate the fair value of the investment and recognize in net income an impairment loss equal to the difference between the fair value and the carrying amount of the equity investment.

 

Our equity investments within the scope of this ASU are limited to our cost method equity investments discussed in Note 7, with the exception of our FHLB stock which is outside the scope of this ASU, and to our marketable equity security discussed in Note 5 for which we had previously elected the fair value option.  Our cost method equity investments within the scope of this ASU do not have readily determinable fair values. Therefore, we have elected the practicability exception whereby we measure these investments at cost, less impairment, plus or minus observable price changes from orderly transactions of identical or similar investments of the same issuer.  Refer to Note 7 for further discussion.

 

Revenue Recognition

 

On January 1, 2018, new accounting rules regarding revenue recognition became effective for public companies with a calendar fiscal year.  None of our significant revenue sources – interest income from loans and investment securities, loan servicing fees, and rental income – are within the scope of the new revenue recognition guidance.  The revenue recognition guidance also included revisions to existing accounting rules regarding the determination of whether a company is acting as a principal or agent in an arrangement and accounting for sales of nonfinancial assets where the seller has continuing involvement.  These additional revisions also did not materially impact the Company.

 

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) shares contingently issuable to our Manager, (iii) the “in-the-money” conversion options associated with our outstanding convertible senior notes (see Notes 10 and 17), and (iv) non-controlling interests that are redeemable with our common stock (see Note 16). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

 

Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities. In addition, the non-controlling interests that are redeemable with our common stock are considered participating securities because they earn a preferred return indexed to the dividend rate on our common stock (see Note 16). 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, 2018 and 2017, 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 February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee.  Lessor accounting was not significantly changed by this ASU.  This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018 by applying a modified retrospective approach. Early application is permitted. We are in the process of assessing the impact this ASU will have on the Company. 

 

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, which mandates use of an “expected loss” credit model for estimating future credit losses of certain financial instruments instead of the “incurred loss” credit model that current GAAP requires.  The “expected loss” model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event in accordance with the current “incurred loss” methodology.  This ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019. Early application is permitted though no earlier than the first interim or annual period beginning after December 15, 2018. Though we have not completed our assessment of this ASU, we expect the ASU to result in our recognition of higher levels of allowances for loan losses.  Our assessment of the estimated amount of such increases remains in process.

 

On January 26, 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, which simplifies the method applied for measuring impairment in cases where goodwill is impaired.  This ASU specifies that goodwill impairment will be measured as the excess of the reporting unit’s carrying value (inclusive of goodwill) over its fair value, eliminating the requirement that all assets and liabilities of the reporting unit be remeasured individually in connection with measurement of goodwill impairment.  This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2019 and is applied prospectively.  Early application is permitted.  We do not expect the application of this ASU to materially impact the Company.

 

On August 28, 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance regarding the designation and measurement of designated hedging relationships. This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018. Early application is permitted. We do not expect the application of this ASU to materially impact the Company. 

 

 

 

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Table of Contents 

3.  Acquisitions and Divestitures

 

Woodstar II Portfolio Acquisition

 

During the three months ended March 31, 2018, we acquired 18 of the 27 affordable housing communities comprising our “Woodstar II Portfolio.”  The Woodstar II Portfolio is comprised of 6,109 units concentrated primarily in Central and South Florida and is 99% occupied.  The 18 affordable housing communities acquired during the three months ended March 31, 2018 comprise 4,057 units and were acquired for $404.7 million, including contingent consideration of $26.7 million (the “Q1 2018 Closing”). The properties acquired in the Q1 2018 Closing were recognized initially at their purchase price of $378.0 million plus capitalized acquisition costs of $3.6 million.  Contingent consideration of $26.7 million will be recognized when the contingency is resolved.  Government sponsored mortgage debt of $7.3 million with weighted average fixed annual interest rates of 2.88% and remaining weighted average terms of 17.7 years was assumed at closing.  We financed the Q1 2018 Closing utilizing new 10-year mortgage debt totaling $300.9 million with weighted average fixed annual interest rates of 3.82% (as set forth in Note 9).  

 

In December 2017, we acquired eight of the affordable housing communities (the “Q4 2017 Closing”), which include 1,740 units, for $156.2 million, including contingent consideration of $10.8 million. We financed the Q4 2017 Closing utilizing 10-year mortgage debt totaling $116.7 million with a fixed 3.81% interest rate.

 

We effectuated the Woodstar II Portfolio acquisitions via a contribution of the properties by third parties (the “Contributors”) to SPT Dolphin Intermediate LLC (“SPT Dolphin”), a newly-formed, wholly-owned subsidiary of the Company.  In exchange for the contribution, the Contributors received cash, Class A units of SPT Dolphin (the “Class A Units”) and rights to receive additional Class A Units if certain contingent events occur.  The Class A unitholders have the right, commencing six months from issuance, to redeem their Class A Units for consideration equal to the current share price of the Company’s common stock on a one-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the de