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, 2018

☐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 every Interactive Data File required to be submitted 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 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 ☐
		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 November 5, 2018 was 275,351,911.

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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, 2017, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018 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;

our ability to integrate our recently completed acquisition of the project finance origination, underwriting and capital markets business of GE Capital Global Holdings, LLC into our business and to achieve the benefits that we anticipate from the acquisition;

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 and Divestitures	18
	Note 4 Loans	21
	Note 5 Investment Securities	27
	Note 6 Properties	31
	Note 7 Investment in Unconsolidated Entities	33
	Note 8 Goodwill and Intangibles	34
	Note 9 Secured Financing Agreements	36
	Note 10 Unsecured Senior Notes	39
	Note 11 Loan Securitization/Sale Activities	41
	Note 12 Derivatives and Hedging Activity	42
	Note 13 Offsetting Assets and Liabilities	44
	Note 14 Variable Interest Entities	45
	Note 15 Related-Party Transactions	47
	Note 16 Stockholders’ Equity and Non-Controlling Interests	49
	Note 17 Earnings per Share	51
	Note 18 Accumulated Other Comprehensive Income	52
	Note 19 Fair Value	53
	Note 20 Income Taxes	57
	Note 21 Commitments and Contingencies	58
	Note 22 Segment Data	58
	Note 23 Subsequent Events	65
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	66
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	101
Item 4.	Controls and Procedures	104
Part II	Other Information
Item 1.	Legal Proceedings	105
Item 1A.	Risk Factors	105
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	110
Item 3.	Defaults Upon Senior Securities	110
Item 4.	Mine Safety Disclosures	110
Item 5.	Other Information	110
Item 6.	Exhibits	111

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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, 2018		December 31, 2017
Assets:
Cash and cash equivalents	$	265,757	$	369,448
Restricted cash		124,264		48,825
Loans held-for-investment, net		8,500,674		6,562,495
Loans held-for-sale ($913,505 and $745,743 held at fair value)		1,326,837		745,743
Loans transferred as secured borrowings		74,281		74,403
Investment securities ($289,554 and $284,735 held at fair value)		763,450		718,203
Properties, net		2,888,737		2,647,481
Properties held-for-sale		52,302		—
Intangible assets ($21,768 and $30,759 held at fair value)		153,948		183,092
Investment in unconsolidated entities		168,788		185,503
Goodwill		256,425		140,437
Derivative assets		59,807		33,898
Accrued interest receivable		52,911		47,747
Other assets		198,688		138,140
Variable interest entity (“VIE”) assets, at fair value		48,034,610		51,045,874
Total Assets	$	62,921,479	$	62,941,289
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	214,902	$	185,117
Related-party payable		25,286		42,369
Dividends payable		132,549		125,916
Derivative liabilities		35,386		36,200
Secured financing agreements, net		8,586,687		5,773,056
Unsecured senior notes, net		2,024,570		2,125,235
Secured borrowings on transferred loans, net		74,148		74,185
VIE liabilities, at fair value		46,945,674		50,000,010
Total Liabilities		58,039,202		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, 279,302,395 issued and 274,122,255 outstanding as of September 30, 2018 and 265,983,309 issued and 261,376,424 outstanding as of December 31, 2017		2,793		2,660
Additional paid-in capital		4,963,061		4,715,246
Treasury stock (5,180,140 shares and 4,606,885 shares)		(104,194)		(92,104)
Accumulated other comprehensive income		67,920		69,924
Accumulated deficit		(308,343)		(217,312)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,621,237		4,478,414
Non-controlling interests in consolidated subsidiaries		261,040		100,787
Total Equity		4,882,277		4,579,201
Total Liabilities and Equity	$	62,921,479	$	62,941,289

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,
	2018		2017		2018		2017
Revenues:
Interest income from loans	$	154,501	$	138,599	$	443,825	$	371,094
Interest income from investment securities		11,508		12,451		37,567		40,045
Servicing fees		27,824		14,842		71,206		47,572
Rental income		91,132		60,153		261,133		176,161
Other revenues		754		722		2,131		2,184
Total revenues		285,719		226,767		815,862		637,056
Costs and expenses:
Management fees		26,519		30,980		84,655		79,997
Interest expense		102,658		76,431		281,433		213,608
General and administrative		31,203		32,892		98,873		95,841
Acquisition and investment pursuit costs		6,527		1,024		8,465		2,232
Costs of rental operations		30,191		23,799		92,781		67,701
Depreciation and amortization		34,293		22,871		103,187		67,131
Loan loss allowance, net		929		(171)		27,726		(3,170)
Other expense		76		376		677		1,276
Total costs and expenses		232,396		188,202		697,797		524,616
Income before other income (loss), income taxes and non-controlling interests		53,323		38,565		118,065		112,440
Other income (loss):
Change in net assets related to consolidated VIEs		33,289		56,177		129,888		203,108
Change in fair value of servicing rights		(974)		(4,867)		(8,991)		(21,301)
Change in fair value of investment securities, net		301		(397)		7,854		(4,061)
Change in fair value of mortgage loans held-for-sale, net		3,940		19,485		26,573		45,484
Earnings (loss) from unconsolidated entities		2,625		(4,689)		6,633		27,763
Gain on sale of investments and other assets, net		1,462		11,877		25,559		17,004
Gain (loss) on derivative financial instruments, net		11,735		(24,224)		27,498		(66,159)
Foreign currency (loss) gain, net		(4,078)		10,660		(3,793)		28,434
Total other-than-temporary impairment (“OTTI”)		—		(66)		—		(175)
Noncredit portion of OTTI recognized in other comprehensive income		—		66		—		66
Net impairment losses recognized in earnings		—		—		—		(109)
Loss on extinguishment of debt		(2,540)		—		(2,726)		(5,916)
Other (loss) income, net		(1,421)		28		(815)		484
Total other income		44,339		64,050		207,680		224,731
Income before income taxes		97,662		102,615		325,745		337,171
Income tax provision		(8,281)		(9,816)		(14,480)		(18,285)
Net income		89,381		92,799		311,265		318,886
Net income attributable to non-controlling interests		(4,845)		(4,371)		(17,567)		(10,720)
Net income attributable to Starwood Property Trust, Inc.	$	84,536	$	88,428	$	293,698	$	308,166

Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic	$	0.31	$	0.34	$	1.11	$	1.18
Diluted	$	0.31	$	0.33	$	1.09	$	1.17

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,
	2018		2017		2018		2017
Net income	$	89,381	$	92,799	$	311,265	$	318,886
Other comprehensive (loss) income (net change by component):
Cash flow hedges		(6)		(22)		(24)		56
Available-for-sale securities		737		3,975		2,923		10,728
Foreign currency translation		(945)		5,337		(4,903)		18,349
Other comprehensive (loss) income		(214)		9,290		(2,004)		29,133
Comprehensive income		89,167		102,089		309,261		348,019
Less: Comprehensive income attributable to non-controlling interests		(4,845)		(4,371)		(17,567)		(10,720)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	84,322	$	97,718	$	291,694	$	337,299

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		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	21,512		—		459	—		—		—		—		459		—		459
Equity offering costs	—		—		(22)	—		—		—		—		(22)		—		(22)
Conversion of 2019 Convertible Notes	11,181,546		112		215,265	—		—		—		—		215,377		—		215,377
Common stock repurchased	—		—		—	573,255		(12,090)		—		—		(12,090)		—		(12,090)
Share-based compensation	1,215,137		12		16,442	—		—		—		—		16,454		—		16,454
Manager incentive fee paid in stock	900,891		9		18,633	—		—		—		—		18,642		—		18,642
Net income	—		—		—	—		—		293,698		—		293,698		17,567		311,265
Dividends declared, $1.44 per share	—		—		—	—		—		(384,729)		—		(384,729)		—		(384,729)
Other comprehensive loss, net	—		—		—	—		—		—		(2,004)		(2,004)		—		(2,004)
VIE non-controlling interests	—		—		—	—		—		—		—		—		(291)		(291)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		387,481		387,481
Distributions to non-controlling interests	—		—		(2,962)	—		—		—		—		(2,962)		(244,185)		(247,147)
Sale of controlling interest in majority owned property asset	—		—		—	—		—		—		—		—		(319)		(319)
Balance, September 30, 2018	279,302,395	$	2,793	$	4,963,061	5,180,140	$	(104,194)	$	(308,343)	$	67,920	$	4,621,237	$	261,040	$	4,882,277

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	24,217		—		541	—		—		—		—		541		—		541
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	849,045		9		13,281	—		—		—		—		13,290		—		13,290
Manager incentive fee paid in stock	639,555		6		14,404	—		—		—		—		14,410		—		14,410
Net income	—		—		—	—		—		308,166		—		308,166		10,720		318,886
Dividends declared, $1.44 per share	—		—		—	—		—		(376,660)		—		(376,660)		—		(376,660)
Other comprehensive income, net	—		—		—	—		—		—		29,133		29,133		—		29,133
VIE non-controlling interests	—		—		—	—		—		—		—		—		1,837		1,837
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		105		105
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(7,519)		(7,519)
Balance, September 30, 2017	265,406,623	$	2,654	$	4,705,044	4,606,885	$	(92,104)	$	(184,073)	$	65,271	$	4,496,792	$	42,942	$	4,539,734

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,
	2018		2017
Cash Flows from Operating Activities:
Net income	$	311,265	$	318,886
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		18,156		14,131
Amortization of discounts and deferred financing costs on senior notes		9,674		17,514
Accretion of net discount on investment securities		(12,013)		(11,669)
Accretion of net deferred loan fees and discounts		(28,954)		(27,014)
Share-based compensation		16,454		13,290
Share-based component of incentive fees		18,642		14,410
Change in fair value of investment securities		(7,854)		4,061
Change in fair value of consolidated VIEs		(12,173)		(59,160)
Change in fair value of servicing rights		8,991		21,301
Change in fair value of loans held-for-sale		(26,573)		(45,484)
Change in fair value of derivatives		(24,339)		62,463
Foreign currency gain (loss), net		3,734		(28,211)
Gain on sale of investments and other assets		(25,559)		(17,004)
Impairment charges on properties and related intangibles		1,864		1,099
Loan loss allowance, net		27,726		(3,170)
Depreciation and amortization		101,760		64,937
Earnings from unconsolidated entities		(6,633)		(27,763)
Distributions of earnings from unconsolidated entities		5,001		4,716
Loss on extinguishment of debt		2,726		5,916
Origination and purchase of loans held-for-sale, net of principal collections		(1,386,609)		(1,487,813)
Proceeds from sale of loans held-for-sale		1,243,109		987,828
Changes in operating assets and liabilities:
Related-party payable, net		(17,083)		(7,829)
Accrued and capitalized interest receivable, less purchased interest		(37,314)		(63,032)
Other assets		(32,348)		(12,198)
Accounts payable, accrued expenses and other liabilities		22,997		37,367
Net cash provided by (used in) operating activities		174,647		(222,428)
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(3,495,080)		(2,195,258)
Proceeds from principal collections on loans		2,225,575