Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
STWD
New York Stock Exchange
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.
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 April 29, 2022 was 306,915,739.
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, 2021 and this Quarterly Report on Form 10-Q, including those set forth under the captions “Risk Factors”, “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;
•the severity and duration of the pandemic of the novel strain of coronavirus (“COVID-19”), actions that may be taken by governmental authorities, businesses and others to contain the COVID-19 pandemic, including variants and resurgences, or to treat its impact and the adverse impacts that the COVID-19 pandemic has had, and will likely continue to have, on the global economy, on the borrowers underlying our real estate-related assets and infrastructure loans and tenants of our owned properties, including their ability to make payments on their loans or to pay rent, as the case may be, and on our operations and financial performance;
•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 achieve the benefits that we anticipate from the prior acquisition of the project finance origination, underwriting and capital markets business of GE Capital Global Holdings, LLC;
•national and local economic and business conditions, including continued disruption from the COVID-19 pandemic;
•the occurrence of certain geo-political events (such as wars, terrorist attacks and tensions between states) that affect the normal and peaceful course of international relations (such as the recent Russian invasion of Ukraine);
•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.
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, 314,360,996 issued and 306,912,305 outstanding as of March 31, 2022 and 312,268,944 issued and 304,820,253 outstanding as of December 31, 2021
3,144
3,123
Additional paid-in capital
5,709,027
5,673,376
Treasury stock (7,448,691 shares)
(138,022)
(138,022)
Accumulated other comprehensive income
35,669
40,953
Retained earnings
669,877
493,106
Total Starwood Property Trust, Inc. Stockholders’ Equity
6,279,695
6,072,536
Non-controlling interests in consolidated subsidiaries
Note: In addition to the VIE assets and liabilities which are separately presented, our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 include assets of $4.6 billion and $3.1 billion, respectively, and liabilities of $3.8 billion and $2.6 billion, respectively, related to consolidated collateralized loan obligations (“CLOs”) and a single asset securitization ("SASB"), which are considered to be VIEs. The CLOs' and SASB's assets can only be used to settle obligations of the CLOs and SASB, and the CLOs' and SASB's liabilities do not have recourse to Starwood Property Trust, Inc. Refer to Note 15 for additional discussion of VIEs.
See notes to condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
As of March 31, 2022
(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 mortgage loans and other real estate investments in the United States (“U.S.”), Europe and Australia. 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 four reportable business segments as of March 31, 2022 and we refer to the investments within these segments as our target assets:
•Real estate commercial and residential lending (the “Commercial and Residential Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, non-agency residential mortgages (“residential loans”), subordinated mortgages, mezzanine loans, preferred equity, commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities (“RMBS”) and other real estate and real estate-related debt investments in the U.S., Europe and Australia (including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on residential property and primarily consist of non-agency residential loans that are not guaranteed by any U.S. Government agency or federally chartered corporation.
•Infrastructure lending (the “Infrastructure Lending Segment”)—engages primarily in originating, acquiring, financing and managing infrastructure debt investments.
•Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multifamily properties and commercial properties subject to net leases, 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.
Our segments exclude 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 Global L.P., a privately-held private equity firm founded by Mr. Sternlicht.
Balance Sheet Presentation of Securitization Variable Interest Entities
We operate investment businesses that acquire unrated, investment grade and non-investment grade rated CMBS and RMBS. 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 we often serve as the special servicer or servicing administrator of the trusts in which we invest, or we have the ability to remove and replace the special servicer without cause, 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, a portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.
Refer to the segment data in Note 23 for a presentation of our business segments 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, 2021 (our “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2022 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, 2021 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 securitization VIEs, we have financed pools of our loans through collateralized loan obligations (“CLOs”) and a single asset securitization (“SASB”), which are considered VIEs. We also hold interests in certain other entities which are considered VIEs as the limited partners of those entities with equity at risk do not collectively possess (i) the right to remove the general partner or dissolve the partnership without cause or (ii) the right to participate in significant decisions made by the partnership.
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 unrated and non-investment grade rated securities issued by securitization trusts. In certain cases, we may contract to provide special servicing activities for these 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, a portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding 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.
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 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 non-performance 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 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 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 trust.
REO assets generally represent a very small percentage of the overall asset pool of a trust. In new issue trusts there are no REO assets. We estimate that REO assets constitute approximately 1% of our consolidated securitization VIE assets, with the remaining 99% 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.
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 certain eligible financial assets and liabilities of our consolidated securitization VIEs, residential loans held-for-investment, loans held-for-sale originated or acquired for future securitization and purchased CMBS issued by VIEs we could consolidate in the future. 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 residential loans held-for-investment were made in order to maintain consistency across all our residential loans. The fair value elections for mortgage loans held-for-sale were made due to the expected short-term holding period of these instruments.
Fair Value Measurements
We measure our mortgage-backed securities, investments of consolidated affordable housing fund, 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 VIEs, we maximize the use of observable inputs over unobservable inputs. Refer to Note 20 for further discussion regarding our fair value measurements.
Loans that are held for investment (“HFI”) are carried at cost, net of unamortized acquisition premiums or discounts, loan fees and origination costs, as applicable, and net of credit loss allowances as discussed below, unless the loans are credit deteriorated or we have elected to apply the fair value option at purchase.
Loans Held-For-Sale
Our loans that we intend to sell or liquidate in the short-term are classified as held-for-sale and are carried at the lower of amortized cost or fair value, unless we have elected to apply the fair value option at origination or purchase.
Investment Securities
We designate our debt investment securities as held-to-maturity (“HTM”), available-for-sale (“AFS”), or trading depending on our investment strategy and ability to hold such securities to maturity. HTM debt securities where we have not elected to apply the fair value option are stated at cost plus any premiums or discounts, which are amortized or accreted through the condensed consolidated statements of operations using the effective interest method. Debt securities we (i) do not hold for the purpose of selling in the near-term, or (ii) may dispose of prior to maturity, are classified as AFS and are carried at fair value in the accompanying financial statements. Unrealized gains or losses on AFS debt securities where we have not elected the fair value option are reported as a component of accumulated other comprehensive income (“AOCI”) in stockholders’ equity. Our HTM and AFS debt securities are also subject to credit loss allowances as discussed below.
Our only equity investment security is carried at fair value, with unrealized holding gains and losses recorded in earnings.
Credit Losses
Loans and Debt Securities Measured at Amortized Cost
ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL 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 under the previous “incurred loss” methodology. The CECL model applies to our HFI loans and our HTM debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities. However, as permitted by ASC 326, we have elected not to measure an allowance for credit losses on accrued interest receivable (which is classified separately on our condensed consolidated balance sheets), but rather write off in a timely manner by reversing interest income and/or cease accruing interest that would likely be uncollectible.
As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. See Note 4 for further discussion of our methodologies.
We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly. Credit deterioration 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 or security. If a loan or security is considered to be credit deteriorated, we depart from the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.
Available-for-Sale Debt Securities
Separate provisions of ASC 326 apply to our AFS debt securities, which are carried at fair value with unrealized gains and losses reported as a component of AOCI. We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration (“PCD”) by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis.
Subsequently, cumulative adverse changes in expected cash flows on our AFS debt securities are recognized currently as an increase to the allowance for credit losses. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.
Investments of Consolidated Affordable Housing Fund
On November 5, 2021, we established Woodstar Portfolio Holdings, LLC (the “Woodstar Fund”), an investment fund which holds our Woodstar multifamily affordable housing portfolios consisting of 59 properties with 15,057 units located in Central and South Florida. As managing member of the Woodstar Fund, we manage interests purchased by third party investors seeking capital appreciation and an ongoing return, for which we earn (i) a management fee based on each investor’s share of total Woodstar Fund equity; and (ii) an incentive distribution if the Woodstar Fund’s returns exceed an established threshold. In connection with the establishment of the Woodstar Fund, we entered into subscription and other related agreements with certain third party institutional investors to sell, through a feeder fund structure, an aggregate 20.6% interest in the Woodstar Fund for an initial aggregate subscription price of $216.0 million, which was adjusted to $214.2 million post-closing. The Woodstar Fund has an initial term of eight years.
Effective with the third party interest sale, the Woodstar Fund has the characteristics of an investment company under ASC 946, Financial Services – Investment Companies. Accordingly, the Woodstar Fund is required to carry the investments in its properties at fair value, with a cumulative effect adjustment between the fair value and previous carrying value of its investments recognized in stockholders’ equity as of November 5, 2021, the date of the Woodstar Fund’s change in status to an investment company. Because we are the primary beneficiary of the Woodstar Fund, which is a VIE (as discussed in Note 15), we consolidate the accounts of the Woodstar Fund into our consolidated financial statements, retaining the fair value basis of accounting for its investments. Realized and unrealized changes in the fair value of the Woodstar Fund’s property investments, and distributions thereon, are recognized in the “Income from affordable housing fund investments” caption within the other income (loss) section of our condensed consolidated statement of operations for the three months ended March 31, 2022. See Note 7 for further details regarding the Woodstar Fund’s investments and related income and Note 17 with respect to its contingently redeemable non-controlling interests which are classified as “Temporary Equity” in our condensed consolidated balance sheets.
Revenue Recognition
Interest Income
Interest income on performing loans and financial instruments is accrued based on the outstanding principal amount and contractual terms of the instrument. For loans where we do not elect the fair value option, origination fees and direct loan origination costs are also recognized in interest income over the loan term as a yield adjustment using the effective interest method. When we elect the fair value option, origination fees and direct loan costs are recorded directly in income and are not deferred. Discounts or premiums associated with the purchase of non-performing loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on expected cash flows through the expected maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections.
We cease accruing interest on non-performing loans at the earlier of (i) the loan becoming significantly past due or (ii) management concluding that a full recovery of all interest and principal is doubtful. Interest income on non-accrual loans in which management expects a full recovery of the loan’s outstanding principal balance is only recognized when received in cash. If a full recovery of principal is doubtful, the cost recovery method is applied whereby any cash received is applied to the outstanding principal balance of the loan. A non-accrual loan is returned to accrual status at such time as the loan becomes contractually current and management believes all future principal and interest will be received according to the contractual loan terms.
For loans acquired with deteriorated credit quality, interest income is only recognized to the extent that our estimate of undiscounted expected principal and interest exceeds our investment in the loan. Such excess, if any, is recognized as interest income on a level-yield basis over the life of the loan.
Upon the sale of loans or securities which are not accounted for pursuant to the fair value option, the excess (or deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain (loss).
Servicing Fees
We typically seek to be the special servicer on CMBS transactions in which we invest. When we are appointed to serve in this capacity, we earn special servicing fees from the related activities performed, which consist primarily of overseeing the workout of under-performing and non-performing loans underlying the CMBS transactions. These fees are recognized in income in the period in which the services are performed and the revenue recognition criteria have been met.
Rental Income
Rental income is recognized when earned from tenants. For leases that provide rent concessions or fixed escalations over the lease term, rental income is recognized on a straight-line basis over the noncancelable term of the lease. In net lease arrangements, costs reimbursable from tenants are recognized in rental income in the period in which the related expenses are incurred as we are generally the primary obligor with respect to purchasing goods and services for property operations. In instances where the tenant is responsible for property maintenance and repairs and contracts and settles such costs directly with third party service providers, we do not reflect those expenses in our consolidated statement of operations as the tenant is the primary obligor.
Foreign Currency Translation
Our assets and liabilities denominated in foreign currencies are translated into U.S. dollars using foreign currency exchange rates at the end of the reporting period. Income and expenses are translated at the average exchange rates for each reporting period. The effects of translating the assets, liabilities and income of our foreign investments held by entities with a U.S. dollar functional currency are included in foreign currency gain (loss) in the consolidated statements of operations or other comprehensive income (“OCI”) for debt securities available-for-sale for which the fair value option has not been elected. The effects of translating the assets, liabilities and income of our foreign investments held by entities with functional currencies other than the U.S. dollar are included in OCI. Realized foreign currency gains and losses and changes in the value of foreign currency denominated monetary assets and liabilities are included in the determination of net income and are reported as foreign currency gain (loss) in our condensed consolidated statements of operations.
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 awards (“RSAs”) and restricted stock units (“RSUs”), (ii) shares contingently issuable to our Manager, (iii) the conversion options associated with our senior convertible notes (the “Convertible Notes”) (see Notes 11 and 18) and (iv) non-controlling interests that are redeemable with our common stock (see Note 17). 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 17). 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, 2022 and 2021, the two-class method resulted in the most dilutive EPS calculation.
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. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our investments, which has a significant impact on the amount of income that we record and/or disclose. The fair value of 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. In addition, the fair value of the Woodstar Fund's investments are dependent upon the
real estate and capital markets, which are cyclical in nature. Property and investment values are affected by, among other things, capitalization rates, the availability of capital, occupancy, rental rates and interest and inflation rates. Amounts ultimately realized from our investments may vary significantly from the fair values presented.
We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2022. However, uncertainty over the ultimate impact the COVID-19 pandemic, including variants and resurgences, will have on the global economy generally, and our business in particular, makes any estimates and assumptions as of March 31, 2022 inherently less certain than they would be absent the current and potential impacts of COVID-19 and geopolitical events. Actual results may ultimately differ from those estimates.
Recent Accounting Developments
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and on January 11, 2021, issued ASU 2021-01, Reference Rate Reform (Topic 848) – Scope, both of which provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. These ASUs are effective through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through March 31, 2022, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
On March 31, 2022, the FASB issued ASU 2022-2, Troubled Debt Restructurings and Vintage Disclosures (Topic 326). ASU 2022-2 eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) and, instead, requires that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The ASU also enhances existing disclosure requirements and introduces new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. The ASU is effective for the Company beginning January 1, 2023 and is generally to be applied prospectively. Early adoption is permitted. We do not expect the application of this ASU to materially impact our consolidated financial statements as our operating practice is generally not to enter into TDRs for troubled loans.
3. Acquisitionsand Divestitures
Investing and Servicing Segment Property Portfolio ("REIS Equity Portfolio")
During the three months ended March 31, 2022, we sold an operating property for $34.5 million. In connection with this sale, we recognized a total gain of $11.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. There were no properties sold within the REIS Equity Portfolio during the three months ended March 31, 2021.
Commercial and Residential Lending Segment
During the three months ended March 31, 2022, we sold a distribution facility located in Orlando, Florida that was previously acquired in April 2019 through foreclosure of a loan with a carrying value of $18.5 million. The property was sold for $114.8 million and we recognized a gain of $86.6 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. During the three months ended March 31, 2021, we sold an operating property relating to a grocery distribution facility located in Montgomery, Alabama that was previously acquired in March 2019 through foreclosure of a loan with a carrying value of $9.0 million ($20.9 million unpaid principal balance net of an $8.3 million allowance and $3.6 million of unamortized discount) at the foreclosure date. The operating property was sold for $31.2 million and we recognized a gain of $17.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.
During the three months ended March 31, 2022 and 2021, we had no significant acquisitions of properties or businesses.
Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option for either. The following tables summarize our investments in mortgages and loans as of March 31, 2022 and December 31, 2021 (dollars in thousands):
(1)Calculated using applicable index rates as of March 31, 2022 and December 31, 2021 for variable rate loans and excludes loans for which interest income is not recognized.
(2)Represents the WAL of each respective group of loans, excluding loans for which interest income is not recognized, as of the respective balance sheet date. The WAL of each individual loan is calculated using amounts and timing of future principal payments, as projected at origination or acquisition.
(3)First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of $1.3 billion and $1.4 billion being classified as first mortgages as of March 31, 2022 and December 31, 2021, respectively.
(4)Subordinated mortgages include B-Notes and junior participation in first mortgages where we do not own the senior A-Note or senior participation. If we own both the A-Note and B-Note, we categorize the loan as a first mortgage loan.
(5)During the three months ended March 31, 2022, $0.3 million of residential loans held-for-investment were reclassified into loans held-for-sale.
(6)Residential loans have a weighted average remaining contractual life of 29.4 years as of both March 31, 2022 and December 31, 2021.
As of March 31, 2022, our variable rate loans held-for-investment, excluding loans for which interest income is not recognized, were as follows (dollars in thousands):
March 31, 2022
Carrying Value
Weighted-average Spread Above Index
Commercial loans
$
13,419,816
4.0
%
Infrastructure loans
2,123,111
3.9
%
Total variable rate loans held-for-investment
$
15,542,927
4.0
%
Credit Loss Allowances
As discussed in Note 2, we do not have a history of realized credit losses on our HFI loans and HTM securities, so we have subscribed to third party database services to provide us with industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios.
For our commercial loans, we utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading CMBS data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-stabilized-value (“LTV”) and debt service coverage ratio (DSCR) metrics, as well as principal balances, property type, location, coupon, origination year, term, subordination, expected repayment dates and future fundings. We also select from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our commercial loans, as set forth in the credit quality indicator table below. A lower LTV ratio typically indicates a lower credit loss risk.
The macroeconomic forecasts do not differentiate among property types or asset classes. Instead, these forecasts reference general macroeconomic growth factors which apply broadly across all assets. However, the COVID-19 pandemic has had a more negative impact on certain property types, principally retail and hospitality, which were initially impacted by lockdowns and partial reopenings and reduced consumer travel. The office sector has also been adversely affected due to the increase in remote working arrangements. The broad macroeconomic forecasts do not account for such differentiation. Accordingly, we have selected a more adverse macroeconomic recovery forecast related to these property types in determining our credit loss allowance.
For our infrastructure loans, we utilize a database of historical infrastructure loan performance that is shared among a consortium of banks and other lenders and compiled by a major bond credit rating agency. The database is representative of industry-wide project finance activity dating back to 1983. We derive historical loss rates from the database filtered by industry, sub-industry, term and construction status for each of our infrastructure loans. Those historical loss rates reflect global
economic cycles over a long period of time as well as average recovery rates. We categorize the results between the power and oil and gas industries, which we consider the most significant indicator of credit quality for our infrastructure loans, as set forth in the credit quality indicator table below.
As discussed in Note 2, we use a discounted cash flow or collateral value approach, rather than the industry loan loss approach described above, to determine credit loss allowances for any credit deteriorated loans.
We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the collateral’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the collateral. In addition, we consider the overall economic environment, real estate or industry sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.
The significant credit quality indicators for our loans measured at amortized cost, which excludes loans held-for-sale, were as follows as of March 31, 2022 (dollars in thousands):
Term Loans Amortized Cost Basis by Origination Year
Revolving Loans Amortized Cost Total
Total Amortized Cost Basis
Credit Loss Allowance
As of March 31, 2022
2022
2021
2020
2019
2018
Prior
Commercial loans:
Credit quality indicator:
LTV < 60%
$
234,534
$
2,744,291
$
505,166
$
978,325
$
558,782
$
699,224
$
—
$
5,720,322
$
3,349
LTV 60% - 70%
667,690
3,901,356
288,906
1,166,327
392,003
82,385
—
6,498,667
7,458
LTV > 70%
53,705
561,838
265,996
415,062
310,158
261,686
—
1,868,445
32,247
Credit deteriorated
—
—
—
—
—
4,925
—
4,925
4,925
Defeased and other
—
—
—
—
—
17,138
—
17,138
—
Total commercial
$
955,929
$
7,207,485
$
1,060,068
$
2,559,714
$
1,260,943
$
1,065,358
$
—
$
14,109,497
$
47,979
Infrastructure loans:
Credit quality indicator:
Power
$
89,110
$
206,412
$
86,988
$
275,264
$
373,959
$
350,008
$
5,112
$
1,386,853
$
5,192
Oil and gas
—
300,666
41,126
257,910
84,805
49,821
1,930
736,258
4,968
Credit deteriorated
—
—
—
—
—
33,288
—
33,288
10,121
Total infrastructure
$
89,110
$
507,078
$
128,114
$
533,174
$
458,764
$
433,117
$
7,042
$
2,156,399
$
20,281
Residential loans held-for-investment, fair value option
55,621
—
Loans held-for-sale
2,684,512
—
Total gross loans
$
19,006,029
$
68,260
Non-Credit Deteriorated Loans
As of March 31, 2022, we had the following loans with a combined amortized cost basis of $505.2 million that were 90 days or greater past due at March 31, 2022: (i) a $199.1 million senior loan on a retail and entertainment project in New Jersey, of which $7.3 million was converted into equity interests (see Note 8); (ii) a $219.8 million senior loan on an office building in California; (iii) a $46.8 million senior participating interest and mezzanine loan secured by an office building in Texas; (iv) $30.3 million of residential loans; and (v) a $9.2 million loan on a hospitality asset in New York that our Investing and Servicing Segment acquired as nonperforming in October 2021. Loans on nonaccrual as of March 31, 2022 include (i) - (iv) above. None of these loans are considered credit deteriorated as we presently expect to recover all amounts due.
Credit Deteriorated Loans
As of March 31, 2022, we had the following loans with a combined amortized cost basis of $38.2 million which were deemed credit deteriorated and are on nonaccrual status: (i) a $33.3 million senior loan participation secured by a natural gas-fired power plant in Massachusetts, for which we recorded a credit loss allowance of $10.1 million in 2021 based on our share
of the estimated fair value of the asset and for which interest collections were current as of March 31, 2022; and (ii) a $4.9 million subordinated loan secured by a department store in Chicago which is fully reserved.
The following tables present the activity in our credit loss allowance for funded loans and unfunded commitments (amounts in thousands):
Funded Commitments Credit Loss Allowance
Loans Held-for-Investment
Total Funded Loans
Three Months Ended March 31, 2022
Commercial
Infrastructure
Credit loss allowance at December 31, 2021
$
46,600
$
20,670
$
67,270
Credit loss provision (reversal), net
1,379
(389)
990
Credit loss allowance at March 31, 2022
$
47,979
$
20,281
$
68,260
Unfunded Commitments Credit Loss Allowance (1)
Loans Held-for-Investment
HTM Preferred
Three Months Ended March 31, 2022
Commercial
Infrastructure
Interests (2)
Total
Credit loss allowance at December 31, 2021
$
6,692
$
145
$
—
$
6,837
Credit loss provision (reversal), net
271
(47)
353
577
Credit loss allowance at March 31, 2022
$
6,963
$
98
$
353
$
7,414
Memo: Unfunded commitments as of March 31, 2022 (3)
(1)Certain fair value option CMBS and RMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810.
(2)Includes $190.6 million and $182.6 million of non-controlling interests in the consolidated entities which hold certain of these CMBS as of March 31, 2022 and December 31, 2021, respectively.
(1)Represents RMBS and CMBS, fair value option amounts eliminated due to our consolidation of securitization VIEs. These amounts are reflected as issuance or repayment of debt of, or distributions from, consolidated VIEs in our consolidated statements of cash flows.
RMBS, Available-for-Sale
The Company classified all of its RMBS not eliminated in consolidation as available-for-sale as of March 31, 2022 and December 31, 2021. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).
The tables below summarize various attributes of our investments in available-for-sale RMBS as of March 31, 2022 and December 31, 2021 (amounts in thousands):
(1)Calculated using the March 31, 2022 one-month LIBOR rate of 0.452% for floating rate securities.
(2)Represents the remaining WAL of each respective group of securities as of the balance sheet date. The WAL of each individual security is calculated using projected amounts and projected timing of future principal payments.
As of March 31, 2022, approximately $118.1 million, or 88%, of RMBS were variable rate. We purchased all of the RMBS at a discount, a portion of which is accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of this accretable discount.
We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.3 million for both the three months ended March 31, 2022 and 2021, recorded as management fees in the accompanying condensed consolidated statements of operations.
The following table presents the gross unrealized losses and estimated fair value of any available-for-sale securities that were in an unrealized loss position as of March 31, 2022 and December 31, 2021, and for which an allowance for credit losses has not been recorded (amounts in thousands):
Estimated Fair Value
Unrealized Losses
Securities with a loss less than 12 months
Securities with a loss greater than 12 months
Securities with a loss less than 12 months
Securities with a loss greater than 12 months
As of March 31, 2022
RMBS
$
3,769
$
—
$
(39)
$
—
As of December 31, 2021
RMBS
$
2,478
$
—
$
(99)
$
—
As of March 31, 2022 and December 31, 2021, there were four securities and one security, respectively, with unrealized losses reflected in the table above. After evaluating the securities and recording adjustments for credit losses, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses are calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) our net amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or credit losses could be materially different from what is currently projected and/or reported.
CMBS and RMBS, Fair Value Option
As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for certain CMBS and RMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of March 31, 2022, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $1.3 billion and $2.8 billion, respectively. As of March 31, 2022, the fair value and unpaid principal balance of RMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $311.3 million and $179.9 million, respectively. The $1.6 billion total fair value balance of CMBS and RMBS represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value (all except $21.9 million at March 31, 2022) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option investment securities.
As of March 31, 2022, $98.2 million of our CMBS were variable rate and none of our RMBS were variable rate.
HTMDebt Securities, Amortized Cost
The table below summarizes our investments in HTM debt securities as of March 31, 2022 and December 31, 2021 (amounts in thousands):
The following table presents the activity in our credit loss allowance for HTM debt securities (amounts in thousands):
CMBS
Preferred Interests
Infrastructure Bonds
Total HTM Credit Loss Allowance
Three Months Ended March 31, 2022
Credit loss allowance at December 31, 2021
$
3,140
$
2,562
$
2,908
$
8,610
Credit loss provision (reversal), net
(2,912)
(2,390)
77
(5,225)
Credit loss allowance at March 31, 2022
$
228
$
172
$
2,985
$
3,385
The table below summarizes the maturities of our HTM debt securities by type as of March 31, 2022 (amounts in thousands):
CMBS
Preferred Interests
Infrastructure Bonds
Total
Less than one year
$
313,993
$
91,394
$
—
$
405,387
One to three years
25,303
27,570
—
52,873
Three to five years
193,848
—
18,602
212,450
Thereafter
—
—
30,596
30,596
Total
$
533,144
$
118,964
$
49,198
$
701,306
Equity Security, Fair Value
During 2012, we acquired 9,140,000 ordinary shares from a related-party in Starwood European Real Estate Finance Limited (“SEREF”), a debt fund that is externally managed by an affiliate of our Manager and is listed on the London Stock Exchange. The fair value of the investment remeasured in USD was $11.6 million as of both March 31, 2022 and December 31, 2021. As of March 31, 2022, our shares represent an approximate 2% interest in SEREF.
6. Properties
Our properties are held within the following portfolios:
Medical Office Portfolio
The Medical Office Portfolio is comprised of 34 medical office buildings acquired during the year ended December 31, 2016. These properties, which collectively comprise 1.9 million square feet, are geographically dispersed throughout the U.S. and primarily affiliated with major hospitals or located on or adjacent to major hospital campuses. The Medical Office Portfolio includes total gross properties and lease intangibles of $762.6 million and debt of $594.9 million as of March 31, 2022.
Master Lease Portfolio
The Master Lease Portfolio is comprised of 16 retail properties geographically dispersed throughout the U.S., with more than 50% of the portfolio, by carrying value, located in Florida, Texas and Minnesota. These properties, which we acquired in September 2017, collectively comprise 1.9 million square feet and were leased back to the seller under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations. The Master Lease Portfolio includes total gross properties of $343.8 million and debt of $193.1 million as of March 31, 2022.
Investing and Servicing Segment Property Portfolio
The REIS Equity Portfolio is comprised of 12 commercial real estate properties and one equity interest in an unconsolidated commercial real estate property which were acquired from CMBS trusts during the previous six years. The REIS Equity Portfolio includes total gross properties and lease intangibles of $198.6 million and debt of $138.6 million as of March 31, 2022.
Woodstar Portfolios
Refer to Note 7 for a discussion of our Woodstar I and Woodstar II Portfolios which are not included in the table below.
(1)Represents properties acquired through loan foreclosure.
During the three months ended March 31, 2022, we sold an operating property within the REIS Equity Portfolio for $34.5 million and recognized a total gain of $11.7 million within gain on sale of investments and other assets in our consolidated statement of operations. Also during the three months ended March 31, 2022, we sold an operating property within the Commercial and Residential Lending Segment for $114.8 million and recognized a gain of $86.6 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. During the three months ended March 31, 2021, we sold an operating property within the Commercial and Residential Lending Segment for $31.2 million and recognized a gain of $17.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. Refer to Note 3 for further discussion.
7. Investments of Consolidated Affordable Housing Fund
As discussed in Note 2, we established the Woodstar Fund effective November 5, 2021, an investment fund which holds our Woodstar multifamily affordable housing portfolios. The Woodstar portfolios consist of the following:
Woodstar I Portfolio
The Woodstar I Portfolio is comprised of 32 affordable housing communities with 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas. During the year ended December 31, 2015, we acquired 18 of the 32 affordable housing communities of the Woodstar I Portfolio, with the final 14 communities acquired during the year ended December 31, 2016. The Woodstar I Portfolio includes properties at fair value of $1.3 billion and debt at fair value of $735.6 million as of March 31, 2022.
Woodstar II Portfolio
The Woodstar II Portfolio is comprised of 27 affordable housing communities with 6,109 units concentrated primarily in Central and South Florida. We acquired eight of the 27 affordable housing communities in December 2017, with the final 19 communities acquired during the year ended December 31, 2018. The Woodstar II Portfolio includes properties at fair value of $1.2 billion and debt at fair value of $500.4 million as of March 31, 2022.
(1)None of these investments are publicly traded and therefore quoted market prices are not available.
(2)Includes a $4.5 million subordinated loan as of both March 31, 2022 and December 31, 2021.
(3)In March 2021, we obtained equity interests in two investor entities that own interests in two entertainment and retail centers in satisfaction of $7.3 million principal amount of a commercial loan. The interests were obtained in order to facilitate repayment of a portion of that loan for which these interests represented underlying collateral. The interests are entitled to preferred treatment in the distribution waterfall and are intended to repay us the $7.3 million principal amount of the loan plus interest. See further discussion in Note 4.
As of March 31, 2022, the carrying value of our equity investment in a residential mortgage originator exceeded the underlying equity in net assets of such investee by $1.6 million. This difference is the result of the Company recording its investment in the investee at its acquisition date fair value, which included certain non-amortizing intangible assets not recognized by the investee. Should the Company determine these intangible assets held by the investee are impaired, the Company will recognize such impairment loss through earnings from unconsolidated entities in our consolidated statement of operations, otherwise, such difference between the carrying value of our equity investment in the residential mortgage originator and the underlying equity in the net assets of the residential mortgage originator will continue to exist.
Other than our equity interest in the residential mortgage originator, there were no differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of March 31, 2022.
During the three months ended March 31, 2022, we did not become aware of (i) any observable price changes in our other equity investments accounted for under the fair value practicability election or (ii) any indicators of impairment.
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s goodwill of $119.4 million at both March 31, 2022 and December 31, 2021 represents the excess of consideration transferred over the fair value of net assets acquired on September 19, 2018 and October 15, 2018. The goodwill recognized is attributable to value embedded in the acquired Infrastructure Lending Segment’s lending platform.
LNR Property LLC (“LNR”)
The Investing and Servicing Segment’s goodwill of $140.4 million at both March 31, 2022 and December 31, 2021 represents the excess of consideration transferred over the fair value of net assets of LNR acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes a network of commercial real estate asset managers, work-out specialists, underwriters and administrative support professionals as well as proprietary historical performance data on commercial real estate assets.
Intangible Assets
Servicing Rights Intangibles
In connection with the LNR acquisition, we identified domestic servicing rights that existed at the purchase date, based upon the expected future cash flows of the associated servicing contracts. As of March 31, 2022 and December 31, 2021, the balance of the domestic servicing intangible was net of $40.8 million and $42.1 million, respectively, which was eliminated in consolidation pursuant to ASC 810 against VIE assets in connection with our consolidation of securitization VIEs. Before VIE consolidation, as of March 31, 2022 and December 31, 2021, the domestic servicing intangible had a balance of $58.7 million and $58.9 million, respectively, which represents our economic interest in this asset.
Lease Intangibles
In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and favorable lease intangible assets associated with certain non-cancelable operating leases of the acquired properties.
The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of March 31, 2022 and December 31, 2021 (amounts in thousands):
The following table summarizes the activity within intangible assets for the three months ended March 31, 2022 (amounts in thousands):
Domestic Servicing Rights
In-place Lease Intangible Assets
Favorable Lease Intangible Assets
Total
Balance as of January 1, 2022
$
16,780
$
31,991
$
14,793
$
63,564
Amortization
—
(1,601)
(313)
(1,914)
Impairment (1)
—
(43)
(4)
(47)
Sales
—
(501)
(38)
(539)
Changes in fair value due to changes in inputs and assumptions
1,084
—
—
1,084
Balance as of March 31, 2022
$
17,864
$
29,846
$
14,438
$
62,148
_________________________________________________
(1) Impairment of intangible lease assets is recognized within other expense in our condensed consolidated statement of operations.
The following table sets forth the estimated aggregate amortization of our in-place lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):
(a)Subject to certain conditions as defined in the respective facility agreement.
(b)For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.
(c)Certain facilities with an outstanding balance of $2.1 billion as of March 31, 2022 are indexed to GBP LIBOR, EURIBOR, BBSY and SONIA. The remainder are indexed to USD LIBOR or SOFR.
(d)Certain facilities with an aggregate initial maximum facility size of $10.7 billion may be increased to $11.6 billion, subject to certain conditions. The $11.6 billion amount includes such upsizes.
(e)Certain facilities with an outstanding balance of $284.1 million as of March 31, 2022 carry a rolling 11-month or 12-month term which may reset monthly or quarterly with the lender's consent. These facilities carry no maximum facility size.
(f)A facility with an outstanding balance of $240.5 million as of March 31, 2022 has a weighted average fixed annual interest rate of 3.20%. All other facilities are variable rate with a weighted average rate of Index + 1.89%.
(g)Includes: (i) $240.5 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $38.8 million outstanding on one of our repurchase facilities that represents the 49% pro rata share owed by a non-controlling partner in a consolidated joint venture (see Note 15).
(h)The maximum facility size as of March 31, 2022 of $650.0 million is scheduled to decline to $450.0 million as of December 31, 2022 and may be increased to $750.0 million, subject to certain conditions.
(i)The weighted average maturity is 5.3 years as of March 31, 2022.
(j)Includes a $600.0 million first mortgage and mezzanine loan secured by our Medical Office Portfolio. This debt has a weighted average interest rate of LIBOR + 2.07% that we swapped to a fixed rate of 3.34%. The remainder have a weighted average rate of Index + 2.35%.
(k)Consists of: (i) a $786.8 million term loan facility that matures in July 2026, of which $390.0 million has an annual interest rate of LIBOR + 2.50% and $396.8 million has an annual interest rate of LIBOR + 3.25%, subject to a 0.75% LIBOR floor, and (ii) a $150.0 million revolving credit facility that matures in April 2026 with an annual interest rate
of SOFR + 2.50%. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $4.8 billion as of March 31, 2022.
The above table no longer reflects property mortgages of the Woodstar Portfolios which, as discussed in Notes 2 and 7, are now reflected within “Investments of consolidated affordable housing fund” on our condensed consolidated balance sheets.
In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.
In March 2022, we amended a Residential Loans credit facility to increase the available borrowings to $500.0 million from $250.0 million and extend the initial maturity for 18 months to March 2024 with a three-year extension option. The margin call provisions under this facility do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks.
Our secured financing agreements contain certain financial tests and covenants. As of March 31, 2022, we were in compliance with all such covenants.
We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the majority of our repurchase facilities, consisting of 66% of these agreements, do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks generally determined on a commercially reasonable basis. To monitor credit risk associated with the performance and value of our loans and investments, our asset management team regularly reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. For the 34% of repurchase agreements which do permit valuation adjustments based on capital market events, approximately 12% of these pertain to our loans held-for-sale, for which we manage credit risk through the purchase of credit instruments. We further seek to manage risks associated with our repurchase agreements by matching the maturities and interest rate characteristics of our loans with the related repurchase agreement.
For the three months ended March 31, 2022 and 2021, approximately $9.6 million and $9.5 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.
As of March 31, 2022, JPMorgan Chase Bank, N.A. and Morgan Stanley Bank, N.A. held collateral sold under certain of our repurchase agreements with carrying values that exceeded the respective repurchase obligations by $666.8 million and $659.8 million, respectively. The weighted average extended maturities of those repurchase agreements were 3.5 and 3.6 years, respectively.
Collateralized Loan Obligations and Single Asset Securitization
Commercial and Residential Lending Segment
In February 2022, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2022-FL3. On the closing date, the CLO issued $1.0 billion of notes and preferred shares, of which $842.5 million of notes were purchased by third party investors. We retained $82.5 million of notes along with preferred shares with a liquidation preference of $75.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO for a period of two years. The reinvestment feature was not utilized during the three months ended March 31, 2022.
In July 2021, we contributed into a single asset securitization, STWD 2021-HTS, a previously originated $230.0 million first mortgage and mezzanine loan on a portfolio of 41 extended stay hotels with $210.1 million of third party financing.
In May 2021, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2021-FL2. On the closing date, the CLO issued $1.3 billion of notes and preferred shares, of which $1.1 billion of notes was purchased by third party investors. We retained $70.1 million of notes, along with preferred shares with a liquidation preference of $127.5 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the three months ended March 31, 2022, we utilized the reinvestment feature, contributing $87.0 million of additional interests into the CLO.
In August 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2019-FL1. On the closing date, the CLO issued $1.1 billion of notes and preferred shares, of which $936.4 million of notes was purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the quarter, the reinvestment period expired, and we repaid CLO debt in the amount of$71.1 million.
Infrastructure Lending Segment
In January 2022, we refinanced a pool of our infrastructure loans held-for-investment through a CLO, STWD 2021-SIF2. On the closing date, the CLO issued $500.0 million of notes and preferred shares, of which $410.0 million of notes were purchased by third party investors. We retained preferred shares with a liquidation preference of $90.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO for a period of three years. During the three months ended March 31, 2022, we utilized the reinvestment feature, contributing $63.1 million of additional interests into the CLO.
In April 2021, we refinanced a pool of our infrastructure loans held-for-investment through a CLO, STWD 2021-SIF1. On the closing date, the CLO issued $500.0 million of notes and preferred shares, of which $410.0 million of notes were purchased by third party investors. We retained preferred shares with a liquidation preference of $90.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the three months ended March 31, 2022, we utilized the reinvestment feature, contributing $25.2 million of additional interests into the CLO.
The following table is a summary of our CLOs and our SASB as of March 31, 2022 and December 31, 2021 (amounts in thousands):
(a)Represents the weighted-average coupon earned on variable rate loans during the respective year-to-date period. Of the loans financed by the STWD 2021-FL2 CLO as of March 31, 2022, 7% earned fixed-rate weighted average interest of 7.55%. Of the loans financed by the STWD 2021-SIF2 CLO as of March 31, 2022, 3% earned fixed-rate weighted average interest of 7.75%. Of the loans financed by the STWD 2021-SIF1 CLO as of March 31, 2022, 3% earned fixed-rate weighted average interest of 5.88%.
(b)Represents the weighted-average maturity, assuming the extended contractual maturity of the collateral assets.
(c)Represents the weighted-average cost of financing incurred during the respective year-to-date period, inclusive of deferred issuance costs.
(d)Repayments of the CLOs and SASB are tied to timing of the related collateral asset repayments. The term of the CLOs and SASB financing obligations represents the legal final maturity date.
We incurred $37.8 million of issuance costs in connection with the CLOs and SASB, which are amortized on an effective yield basis over the estimated life of the CLOs and SASB. For the three months ended March 31, 2022 and 2021, approximately $2.4 million and $0.6 million, respectively, of amortization of deferred financing costs was included in interest expense on our condensed consolidated statements of operations. As of March 31, 2022 and December 31, 2021, our unamortized issuance costs were $26.2 million and $17.7 million, respectively.
The CLOs and SASB are considered VIEs, for which we are deemed the primary beneficiary. We therefore consolidate the CLOs and SASB. Refer to Note 15 for further discussion.
Maturities
Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The following table sets forth our principal repayments schedule for secured financings based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):
(1)Effective rate includes the effects of underwriter purchase discount.
(2)The coupon on the 2025 Senior Notes is 4.75%. At closing, we swapped $470.0 million of the notes to a floating rate of LIBOR + 2.53%.
(3)The coupon on the 2027 Senior Notes is 4.375%. At closing, we swapped the notes to a floating rate of SOFR + 2.95%.
Our unsecured senior notes contain certain financial tests and covenants. As of March 31, 2022, we were in compliance with all such covenants.
Senior Notes
On January 25, 2022, we issued $500.0 million of 4.375% Senior Notes due 2027 (the “2027 Senior Notes”). The 2027 Senior Notes mature on January 15, 2027. Prior to July 15, 2026, we may redeem some or all of the 2027 Senior Notes at a price equal to 100% of the principal amount thereof, plus the applicable “make-whole” premium as of the applicable date of redemption. On and after July 15, 2026, we may redeem some or all of the 2027 Senior Notes at a price equal to 100% of the principal amount thereof. In addition, prior to July 15, 2025, we may redeem up to 40% of the 2027 Senior Notes at the applicable redemption price using the proceeds of certain equity offerings.
Convertible Senior Notes
On March 29, 2017, we issued $250.0 million of 4.375% Convertible Senior Notes due 2023 (the “2023 Convertible Notes”) which remain outstanding at March 31, 2022 and mature on April 1, 2023.
For both the three months ended March 31, 2022 and 2021, we recognized interest expense of $2.9 million from our Convertible Notes.
The following table details the conversion attributes of our Convertible Notes outstanding as of March 31, 2022 (amounts in thousands, except rates):
(1)The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of 2023 Convertible Notes converted, as adjusted in accordance with the indenture governing the 2023 Convertible Notes (including the applicable supplemental indenture).
(2)As of March 31, 2022, the market price of the Company’s common stock was $24.17.
The if-converted value of the 2023 Convertible Notes was less than their principal amount by $16.8 million at March 31, 2022 as the closing market price of the Company’s common stock of $24.17 was less than the implicit conversion price of $25.91 per share. The if-converted value of the principal amount of the 2023 Convertible Notes was $233.2 million as of March 31, 2022. As of March 31, 2022, the net carrying amount and fair value of the 2023 Convertible Notes was $249.3 million and $252.4 million, respectively.
Upon conversion of the 2023 Convertible Notes, settlement may be made in common stock, cash or a combination of both, at the option of the Company.
Conditions for Conversion
Prior to October 1, 2022, the 2023 Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is at least 110% of the conversion price of the 2023 Convertible Notes for at least 20 out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the 2023 Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10% or (4) certain other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.
On or after October 1, 2022, holders of the 2023 Convertible Notes may convert each of their notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
12. Loan Securitization/Sale Activities
As described below, we regularly sell loans and notes under various strategies. We evaluate such sales as to whether they meet the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transfer of control.
Loan Securitizations
Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in part by these assets, as well as other assets transferred to the VIE by third parties. Within the Commercial and Residential Lending Segment, we acquire residential loans with the intent to sell these mortgage loans to VIEs for the purpose of securitization. These VIEs then issue RMBS that are collateralized by these assets.
In certain instances, we retain an interest in the CMBS or RMBS VIE and serve as special servicer or servicing administrator for the VIE. In these circumstances, we generally consolidate the VIE into which the loans were sold. The securitizations are subject to optional redemption after a certain period of time or when the pool balance falls below a specified threshold.
The following summarizes the face amount and proceeds of commercial and residential loans securitized for the three months ended March 31, 2022 and 2021 (amounts in thousands):
Commercial Loans
Residential Loans
Face Amount
Proceeds
Face Amount
Proceeds
For the Three Months Ended March 31,
2022
$
347,442
$
342,067
$
1,077,958
$
1,100,284
2021
85,037
89,710
383,549
389,798
The securitization of these commercial and residential loans does not result in a discrete gain or loss since they are carried under the fair value option.
Our securitizations have each been structured as bankruptcy-remote entities whose assets are not intended to be available to the creditors of any other party.
Within the Commercial and Residential Lending Segment, we originate or acquire commercial mortgage loans, subsequently selling all or a portion thereof. Typically, our motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will retain and hold for investment. We also may sell certain of our previously-acquired residential loans to third parties outside a securitization. The following table summarizes our loans sold by the Commercial and Residential Lending Segment, net of expenses (amounts in thousands):
(1)During the three months ended March 31, 2022, includes a sale of $745.0 million of agency-eligible residential loans at face amount which is subject to a post-closing contingent sales price adjustment based on the gain or loss to the purchaser/securitization underwriter, less underwriting costs, if those loans are sold into a future securitization.
There were no sales of commercial loans within the Commercial and Residential Lending Segment during the three months ended March 31, 2022 and 2021.
Infrastructure Loan Sales
There were no sales of loans within the Infrastructure Lending Segment during the three months ended March 31, 2022 and 2021.
13. Derivatives and Hedging Activity
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. Refer to Note 14 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.
Designated Hedges
The Company does not generally elect to apply the hedge accounting designation to its hedging instruments. As of March 31, 2022 and December 31, 2021, the Company did not have any designated hedges.
Non-designated Hedges and Derivatives
We have entered into the following types of non-designated hedges and derivatives:
•Foreign exchange (“Fx”) forwards whereby we agree to buy or sell a specified amount of foreign currency for a specified amount of USD at a future date, economically fixing the USD amounts of foreign denominated cash flows we expect to receive or pay related to certain foreign denominated loan investments;
•Interest rate contracts which hedge a portion of our exposure to changes in interest rates;
•Credit instruments which hedge a portion of our exposure to the credit risk of our commercial loans held-for-sale; and
•Interest rate swap guarantees whereby we guarantee the interest rate swap obligations of certain Infrastructure Lending borrowers. Our interest rate swap guarantees were assumed in connection with the acquisition of the Infrastructure Lending Segment.
The following table summarizes our non-designated derivatives as of March 31, 2022 (notional amounts in thousands):
Type of Derivative
Number of Contracts
Aggregate Notional Amount
Notional Currency
Maturity
Fx contracts – Buy Euros ("EUR")
18
24,893
EUR
May 2022 - June 2023
Fx contracts – Buy Pounds Sterling ("GBP")
11
9,980
GBP
May 2022 - October 2024
Fx contracts – Buy Australian dollar ("AUD")
6
167,662
AUD
April 2022 - August 2023
Fx contracts – Sell EUR
202
525,437
EUR
April 2022 - November 2025
Fx contracts – Sell GBP
159
558,646
GBP
April 2022 - April 2027
Fx contracts – Sell AUD
81
298,778
AUD
April 2022 - January 2025
Interest rate swaps – Paying fixed rates
44
2,877,222
USD
April 2024 - April 2032
Interest rate swaps – Receiving fixed rates
2
970,000
USD
March 2025 - January 2027
Interest rate caps
7
702,000
USD
October 2022 - April 2025
Interest rate caps
1
61,000
GBP
April 2024
Credit instruments
4
84,000
USD
December 2031 - August 2061
Interest rate swap guarantees
4
275,345
USD
August 2022 - June 2025
Total
539
The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 (amounts in thousands):
Fair Value of Derivatives in an Asset Position (1) as of
Fair Value of Derivatives in a Liability Position (2) as of
(1)Classified as derivative assets in our condensed consolidated balance sheets.
(2)Classified as derivative liabilities in our condensed consolidated balance sheets.
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021 (amounts in thousands):
The following tables present the potential effects of netting arrangements on our financial position for financial assets and liabilities within the scope of ASC 210-20, Balance Sheet—Offsetting, which for us are derivative assets and liabilities as well as repurchase agreement liabilities (amounts in thousands):
(ii) Gross Amounts Offset in the Statement of Financial Position
(iii) = (i) - (ii) Net Amounts Presented in the Statement of Financial Position
(iv) Gross Amounts Not Offset in the Statement of Financial Position
(i) Gross Amounts Recognized
Financial Instruments
Cash Collateral Received / Pledged
(v) = (iii) - (iv) Net Amount
As of March 31, 2022
Derivative assets
$
60,869
$
—
$
60,869
$
28,657
$
—
$
32,212
Derivative liabilities
$
38,709
$
—
$
38,709
$
28,657
$
9,928
$
124
Repurchase agreements
8,920,482
—
8,920,482
8,920,482
—
—
$
8,959,191
$
—
$
8,959,191
$
8,949,139
$
9,928
$
124
As of December 31, 2021
Derivative assets
$
48,216
$
—
$
48,216
$
12,870
$
21,290
$
14,056
Derivative liabilities
$
13,421
$
—
$
13,421
$
12,870
$
291
$
260
Repurchase agreements
9,542,034
—
9,542,034
9,542,034
—
—
$
9,555,455
$
—
$
9,555,455
$
9,554,904
$
291
$
260
15. Variable Interest Entities
Investment Securities
As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation, including our investments in CMBS, RMBS and our retained interests in securitization transactions we initiated, all of which are generally considered to be variable interests in VIEs.
Securitization VIEs consolidated in accordance with ASC 810 are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The assets and other instruments held by these securitization entities are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated entities, nor to us as the primary beneficiary. 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, a portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.
VIEs in which we are the Primary Beneficiary
The inclusion of the assets and liabilities of securitization VIEs in which we are deemed the primary beneficiary has no economic effect on us. Our exposure to the obligations of securitization VIEs is generally limited to our investment in these entities. We are not obligated to provide, nor have we provided, any financial support for any of these consolidated structures.
As discussed in Note 10, we have refinanced various pools of our commercial and infrastructure loans held-for-investment through five CLOs and one SASB, which are considered to be VIEs. We are the primary beneficiary of, and therefore consolidate, the CLOs and SASB in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager, collateral advisor, or controlling class representative that most significantly impact the CLOs’ and SASB's economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the CLOs and SASB that could be potentially significant through the subordinate interests we own.
The following table details the assets and liabilities of our consolidated CLOs and SASB as of March 31, 2022 and December 31, 2021 (amounts in thousands):
March 31, 2022
December 31, 2021
Assets:
Cash and cash equivalents
$
39,194
$
15,297
Loans held-for-investment
4,449,994
3,073,572
Investment securities
29,132
11,426
Accrued interest receivable
12,187
8,936
Other assets
34,150
11,213
Total Assets
$
4,564,657
$
3,120,444
Liabilities
Accounts payable, accrued expenses and other liabilities
$
6,076
$
3,335
Collateralized loan obligations and single asset securitization, net
3,797,895
2,616,116
Total Liabilities
$
3,803,971
$
2,619,451
Assets held by the CLOs and SASB are restricted and can be used only to settle obligations of the CLOs and SASB, including the subordinate interests owned by us. The liabilities of the CLOs and SASB are non-recourse to us and can only be satisfied from the assets of the CLOs and SASB.
We also hold controlling interests in other non-securitization entities that are considered VIEs. The Woodstar Fund, Woodstar Feeder Fund, L.P. and one of the Woodstar Fund’s indirect investees, SPT Dolphin Intermediate LLC (“SPT Dolphin”), the entity which holds the Woodstar II Portfolio, are each VIEs because the third party interest holders do not carry kick-out rights or substantive participating rights. We were deemed to be the primary beneficiary of those VIEs because we possess both the power to direct the activities of the VIEs that most significantly impact their economic performance and a significant economic interest in each entity. The Woodstar Fund had total assets of $1.3 billion, including its indirect investment in SPT Dolphin, and no significant liabilities as of March 31, 2022. As of March 31, 2022, Woodstar Feeder Fund, L.P. and its consolidated subsidiary which is also considered a VIE, Woodstar Feeder REIT, LLC, had a $0.4 billion investment in the Woodstar Fund, had no significant liabilities and had temporary equity of $0.3 billion consisting of the contingently redeemable non-controlling interests of the third party investors (see Note 17).
We also hold a 51% controlling interest in a joint venture (the “CMBS JV”) within our Investing and Servicing Segment, which is considered a VIE because the third party interest holder does not carry kick-out rights or substantive participating rights. We are deemed the primary beneficiary of the CMBS JV. This VIE had total assets of $341.4 million and liabilities of $79.6 million as of March 31, 2022. Refer to Note 17 for further discussion.
In addition to the above non-securitization entities, we have smaller VIEs with total assets of $75.4 million and liabilities of $30.8 million as of March 31, 2022.
VIEs in which we are not the Primary Beneficiary
In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not appointed, or do not serve as, special servicer or servicing administrator or (ii) an unrelated third party has the rights to unilaterally remove us as special servicer without cause. In these instances, we do not have the power to direct activities that most significantly impact the VIE’s economic performance. In other cases, the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant. For these structures, we are not deemed to be the primary beneficiary of the VIE, and we do not consolidate these VIEs.
As noted above, we are not obligated to provide, nor have we provided, any financial support for any of our securitization VIEs, whether or not we are deemed to be the primary beneficiary. As such, the risk associated with our involvement in these VIEs is limited to the carrying value of our investment in the entity. As of March 31, 2022, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $21.9 million on a fair value basis.
As of March 31, 2022, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances, excluding the notional value of interest-only securities, of $4.8 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.
We also hold passive non-controlling interests in certain unconsolidated entities that are considered VIEs. We are not the primary beneficiaries of these VIEs as we do not possess the power to direct the activities of the VIEs that most significantly impact their economic performance and therefore report our interests, which totaled $22.5 million as of March 31, 2022, within investments in unconsolidated entities on our consolidated balance sheet. Our maximum risk of loss is limited to our carrying value of the investments.
16. Related-Party Transactions
Management Agreement
We are party to a management agreement (the “Management Agreement”) with our Manager. Under the Management Agreement, our Manager, subject to the oversight of our board of directors, is required to manage our day to day activities, for which our Manager receives a base management fee and is eligible for an incentive fee and stock awards. Our Manager’s personnel perform certain due diligence, legal, management and other services that outside professionals or consultants would otherwise perform. As such, in accordance with the terms of our Management Agreement, our Manager is paid or reimbursed for the documented costs of performing such tasks, provided that such costs and reimbursements are in amounts no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.
Base Management Fee. For the three months ended March 31, 2022 and 2021, approximately $21.5 million and $19.2 million, respectively, was incurred for base management fees. As of March 31, 2022 and December 31, 2021, there were $21.5 million and $20.3 million, respectively, of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.
Incentive Fee. For the three months ended March 31, 2022 and 2021, approximately $29.0 million and $13.1 million was incurred for incentive fees. As of March 31, 2022 and December 31, 2021, there were $29.3 million and $51.2 million of unpaid incentive fees included in related-party payable in our condensed consolidated balance sheets.
Expense Reimbursement. For the three months ended March 31, 2022 and 2021, approximately $1.7 million and $1.5 million, respectively, was incurred for executive compensation and other reimbursable expenses and recognized within general and administrative expenses in our condensed consolidated statements of operations. As of March 31, 2022 and December 31, 2021, there were $5.8 million and $4.9 million, respectively, of unpaid reimbursable executive compensation and other expenses included in related-party payable in our condensed consolidated balance sheets.
Equity Awards. In certain instances, we issue RSAs to certain employees of affiliates of our Manager who perform services for us. During the three months ended March 31, 2022 and 2021, we granted 200,972 and 981,951 RSAs, respectively, at grant date fair values of $4.8 million and $19.6 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $2.7 million and $2.4 million during the three months ended March 31, 2022 and 2021, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. These shares generally vest over a three-year period.
Manager Equity Plan
In May 2017, the Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager Equity Plan (the “2017 Manager Equity Plan”), which replaced the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”). In November 2020, we granted 1,800,000 RSUs to our Manager under the 2017 Manager Equity Plan. In September 2019, we granted 1,200,000 RSUs to our Manager under the 2017 Manager Equity Plan. In April 2018, we granted 775,000 RSUs to our Manager under the 2017 Manager Equity Plan. In connection with these grants and prior similar grants, we recognized share-based compensation expense of $4.5 million and $5.9 million within management fees in our condensed consolidated statements of operations for the three months ended March 31, 2022 and 2021, respectively. Refer to Note 17 for further discussion of these grants.
Investments in Loans and Securities
In March 2022, we originated a new loan on the development and recapitalization of luxury rental cabins with a total commitment of $200.0 million, of which $84.5 million was outstanding as of March 31, 2022. The loan bears interest at SOFR + 6.50% plus fees and contains a term of 24 months with threeone-year extension options. The proceeds were partially used to
repay an existing $99.0 million first mortgage loan that we originated in February 2020. Certain members of our executive team and board of directors own equity interests in the borrower.
During the three months ended March 31, 2022, the Company acquired $623.9 million of loans from a residential mortgage originator in which it holds an equity interest. Additionally, as of March 31, 2022, the Company had outstanding residential mortgage loan purchase commitments of $306.7 million to this residential mortgage originator. Refer to Note 8 for further discussion.During the three months ended March 31, 2022, the Company received proceeds of $4.4 million from the sale of loans to the residential mortgage originator.
Lease Arrangements
In March 2020, we entered into an office lease agreement with an entity which is controlled by our Chairman and CEO through majority equity ownership of the entity. The leased premises serve as our new Miami Beach office following the expiration of our former lease in Miami Beach. The lease is for up to 74,000 square feet of office space, has an initial term of 15 years and requires monthly lease payments starting in the tenth month after lease commencement, which is pending final completion of the premises. The lease payments are based on an annual base rate of $52.00 per square foot that increases by 3% each anniversary following commencement, plus our pro rata share of building operating expenses. Prior to the execution of this lease, we engaged an independent third party leasing firm and external counsel to advise the independent directors of our board of directors on market terms for the lease. The terms of the lease were approved by our independent directors. In April 2020 we provided a $1.9 million cash security deposit to the landlord. During the three months ended March 31, 2022, we made payments to the landlord of $1.8 million for reimbursements relating to tenant improvements under the terms of the lease.
Other Related-Party Arrangements
Highmark Residential (“Highmark”), an affiliate of our Manager, provides property management services for properties within our Woodstar I and Woodstar II Portfolios. Fees paid to Highmark are calculated as a percentage of gross receipts and are at market terms. During the three months ended March 31, 2022 and 2021, property management fees to Highmark of $1.4 million and $0.7 million, respectively, were recognized in our condensed consolidated statements of operations.
Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.
During the three months ended March 31, 2022, our board of directors declared the following dividends:
Declaration Date
Record Date
Ex-Dividend Date
Payment Date
Amount
Frequency
3/14/22
3/31/22
3/30/22
4/15/22
$
0.48
Quarterly
During the three months ended March 31, 2022 and 2021, there were no shares issued under our At-The-Market Equity Offering Sales Agreement. During the three months ended March 31, 2022 and 2021, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.
Equity Incentive Plans
In May 2017, the Company’s shareholders approved the 2017 Manager Equity Plan and the Starwood Property Trust, Inc. 2017 Equity Plan (the “2017 Equity Plan”), which allow for the issuance of up to 11,000,000 stock options, stock appreciation rights, RSAs, RSUs or other equity-based awards or any combination thereof to the Manager, directors, employees, consultants or any other party providing services to the Company. The 2017 Manager Equity Plan succeeds and replaces the Manager Equity Plan and the 2017 Equity Plan succeeds and replaces the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”) and the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (the “Non-Executive Director Stock Plan”).
The table below summarizes our share awards granted or vested under the Manager Equity Plan and the 2017 Manager Equity Plan during the three months ended March 31, 2022 and 2021 (dollar amounts in thousands):
(1)Of the amount granted, 218,898 vested immediately on the grant date and the remaining amount vests over a three-year period.
Schedule of Non-Vested Shares and Share Equivalents
2017 Equity Plan
2017 Manager Equity Plan
Total
Weighted Average Grant Date Fair Value (per share)
Balance as of January 1, 2022
2,406,730
1,295,277
3,702,007
$
18.90
Granted
784,893
—
784,893
23.81
Vested
(600,902)
(231,759)
(832,661)
17.73
Forfeited
(3,689)
—
(3,689)
23.95
Balance as of March 31, 2022
2,587,032
1,063,518
3,650,550
20.21
As of March 31, 2022, there were 2.4 million shares of common stock available for future grants under the 2017 Manager Equity Plan and the 2017 Equity Plan.
Non-Controlling Interests in Consolidated Subsidiaries
As discussed in Note 2, on November 5, 2021 we sold a 20.6% non-controlling interest in the Woodstar Fund to third party investors for net cash proceeds of $214.2 million. Under the Woodstar Fund operating agreement, such interests are contingently redeemable by us, at the option of the interest holder, for cash at liquidation fair value if any assets remain upon termination of the Woodstar Fund. The Woodstar Fund operating agreement specifies an eight-year term with twoone-year extension options, the first at our option and the second subject to consent of an advisory committee representing the non-controlling interest holders. Accordingly, these contingently redeemable non-controlling interests have been classified as “Temporary Equity” in our condensed consolidated balance sheets and represent the fair value of the Woodstar Fund’s net assets allocable to those interests. During the three months ended March 31, 2022, net income attributable to these non-controlling interests was $47.7 million.
In connection with our Woodstar II Portfolio acquisitions, we issued 10.2 million Class A Units in our subsidiary, SPT Dolphin, and rights to receive an additional 1.9 million Class A Units if certain contingent events occur. As of March 31, 2022, all of the 1.9 million contingent Class A Units were issued. The Class A Units are redeemable 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 determination of the Company. There were 9.8 million Class A Units outstanding as of March 31, 2022. The outstanding Class A Units are reflected as non-controlling interests in consolidated subsidiaries on our consolidated balance sheets, the balance of which was $208.5 million as of March 31, 2022 and December 31, 2021.
To the extent SPT Dolphin has sufficient cash available, the Class A Units earn a preferred return indexed to the dividend rate of the Company’s common stock. Any distributions made pursuant to this waterfall are recognized within net income attributable to non-controlling interests in our condensed consolidated statements of operations. During the three months ended March 31, 2022 and 2021, we recognized net income attributable to non-controlling interests of $4.7 million and $5.1 million, respectively, associated with these Class A Units.
As discussed in Note 15, we hold a 51% controlling interest in the CMBS JV within our Investing and Servicing Segment. Because the CMBS JV is deemed a VIE for which we are the primary beneficiary, the 49% interest of our joint venture partner is reflected as a non-controlling interest in consolidated subsidiaries on our condensed consolidated balance sheets, and any net income attributable to this 49% joint venture interest is reflected within net income attributable to non-controlling interests in our condensed consolidated statement of operations. The non-controlling interests in the CMBS JV were $140.1 million and $131.9 million as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022 and 2021, net income attributable to non-controlling interests was $3.6 million and $5.4 million, respectively.
The following table provides a reconciliation of net income and the number of shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share amounts):
For the Three Months Ended March 31,
2022
2021
Basic Earnings
Income attributable to STWD common stockholders
$
324,599
$
111,378
Less: Income attributable to participating shares not already deducted as non-controlling interests
(8,869)
(1,925)
Basic earnings
$
315,730
$
109,453
Diluted Earnings
Income attributable to STWD common stockholders
$
324,599
$
111,378
Less: Income attributable to participating shares not already deducted as non-controlling interests
(8,869)
(1,925)
Add: Interest expense on Convertible Notes
2,904
2,916
Add: Undistributed earnings to participating shares
7,342
—
Less: Undistributed earnings reallocated to participating shares
(7,109)
—
Diluted earnings
$
318,867
$
112,369
Number of Shares:
Basic — Average shares outstanding
302,944
283,319
Effect of dilutive securities — Convertible Notes
9,649
9,649
Effect of dilutive securities — Contingently issuable shares
605
263
Effect of dilutive securities — Unvested non-participating shares
131
—
Diluted — Average shares outstanding
313,329
293,231
Earnings Per Share Attributable to STWD Common Stockholders:
Basic
$
1.04
$
0.39
Diluted
$
1.02
$
0.38
As of March 31, 2022 and 2021, participating shares of 13.0 million and 14.6 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above. Such participating shares at March 31, 2022 and 2021 included 9.8 million and 10.6 million potential shares, respectively, of our common stock issuable upon redemption of the Class A Units in SPT Dolphin, as discussed in Note 17.
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Valuation Process
We have valuation control processes in place to validate the fair value of the Company’s financial assets and liabilities measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable.
Pricing Verification—We use recently executed transactions, other observable market data such as exchange data, broker/dealer quotes, third party pricing vendors and aggregation services for validating the fair values generated using valuation models. Pricing data provided by approved external sources is evaluated using a number of approaches; for example, by corroborating the external sources’ prices to executed trades, analyzing the methodology and assumptions used by the external source to generate a price and/or by evaluating how active the third party pricing source (or originating sources used by the third party pricing source) is in the market.
Unobservable Inputs—Where inputs are not observable, we review the appropriateness of the proposed valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs.
Any changes to the valuation methodology will be reviewed by our management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value could result in a different estimate of fair value at the reporting date.
Fair Value on a Recurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a recurring basis as follows:
Loans held-for-sale, commercial
We measure the fair value of our commercial mortgage loans held-for-sale using a discounted cash flow analysis unless observable market data (i.e., securitized pricing) is available. A discounted cash flow analysis requires management to make estimates regarding future interest rates and credit spreads. The most significant of these inputs relates to credit spreads and is unobservable. Thus, we have determined that the fair values of mortgage loans valued using a discounted cash flow analysis should be classified in Level III of the fair value hierarchy, while mortgage loans valued using securitized pricing should be classified in Level II of the fair value hierarchy. Mortgage loans classified in Level III are transferred to Level II if securitized pricing becomes available.
Loans held-for-sale and loans held-for-investment, residential
We measure the fair value of our residential loans held-for-sale and held-for-investment based on the net present value of expected future cash flows using a combination of observable and unobservable inputs. Observable market participant assumptions include pricing related to trades of residential loans with similar characteristics. Unobservable inputs include the expectation of future cash flows, which involves judgments about the underlying collateral, the creditworthiness of the borrower, estimated prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs, these loans have been classified within Level III.
RMBS
RMBS are valued utilizing observable and unobservable market inputs. The observable market inputs include recent transactions, broker quotes and vendor prices (“market data”). However, given the implied price dispersion amongst the market data, the fair value determination for RMBS has also utilized significant unobservable inputs in discounted cash flow models including prepayments, default and severity estimates based on the recent performance of the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macroeconomic events (e.g., housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs these securities have been classified within Level III.
CMBS
CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities and the spreads used in the prior valuation. We obtain current market spread information where available and use this information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value hierarchy. CMBS may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the CMBS become or cease to be observable.
Equity security
The equity security is publicly registered and traded in the U.S. and its market price is listed on the London Stock Exchange. The security has been classified within Level I.
Woodstar Fund Investments
The fair value of investments held by the Woodstar Fund is determined based on observable and unobservable market inputs. The initial fair value of the Woodstar Fund's investments at its November 5, 2021 establishment date was determined by reference to the purchase price paid by third party investors, which was consistent with both a recent external appraisal as well as our extensive marketing efforts to sell interests in the Woodstar Fund, plus working capital.
For the properties, the third party appraisal applied the income capitalization approach with corroborative support from the sales comparison approach. The cost approach was not employed, as it is typically not emphasized by potential investors in the multifamily affordable housing sector. The income capitalization approach estimates an income stream for a property over a 10-year period and discounts this income plus a reversion (presumed sale) into a present value at a risk adjusted discount rate. Terminal capitalization rates and discount rates utilized in this approach are derived from market transactions as well as other financial and industry data.
For secured financing, the third party appraisal discounted the contractual cash flows at the interest rate at which such arrangements would bear if executed in the current market. The fair value of investment level working capital is assumed to approximate carrying value due to its primarily short-term monetary nature. The fair value of interest rate derivatives is determined using the methodology described in the Derivatives discussion below.
Internal valuations at interim quarter ends are prepared by management. The valuation of properties is based on a direct income capitalization approach, whereby a direct capitalization market rate is applied to annualized in-place net operating income at the portfolio level. The direct capitalization rate is initially calibrated to the implied rate from the latest appraisal and
adjusted for subsequent changes in current market capitalization rates for sales of comparable multifamily properties. The valuations of secured financing agreements, working capital and interest rate derivatives are consistent with the methodologies described in the paragraph above.
Given the significance of the unobservable inputs used in the respective valuations, the Woodstar Fund’s investments have been classified within Level III of the fair value hierarchy.
Domestic servicing rights
The fair value of this intangible is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this intangible in its entirety should be classified in Level III of the fair value hierarchy.
Derivatives
The valuation of derivative contracts are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The valuation of over the counter derivatives are determined using discounted cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. For credit instruments, fair value is determined based on changes in the relevant indices from the date of initiation of the instrument to the reporting date, as these changes determine the amount of any future cash settlement between us and the counterparty. These indices are considered Level II inputs as they are directly observable.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of March 31, 2022 and December 31, 2021, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level II of the fair value hierarchy.
Liabilities of consolidated VIEs
Our consolidated VIE liabilities generally represent bonds that are not owned by us. The majority of these are either traded in the marketplace or can be analogized to similar securities that are traded in the marketplace. For these liabilities, pricing is considered to be Level II, where the valuation is based upon quoted prices for similar instruments traded in active markets. We generally utilize third party pricing service providers for valuing these liabilities. In order to determine whether to utilize the valuations provided by third parties, we conduct an ongoing evaluation of their valuation methodologies and processes, as well as a review of the individual valuations themselves. In evaluating third party pricing for reasonableness, we consider a variety of factors, including market transaction information for the particular bond, market transaction information for bonds within the same trust, market transaction information for similar bonds, the bond’s ratings and the bond’s subordination levels.
For the minority portion of our consolidated VIE liabilities which consist of unrated or non-investment grade bonds that are not owned by us, pricing may be either Level II or Level III. If independent third party pricing similar to that noted above is available, we consider the valuation to be Level II. If such third party pricing is not available, the valuation is generated from model-based techniques that use significant unobservable assumptions, and we consider the valuation to be Level III. For VIE liabilities classified as Level III, valuation is determined based on discounted expected future cash flows which take into consideration expected duration and yields based on market transaction information, ratings, subordination levels, vintage and current market spread. VIE liabilities may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the VIE liabilities become or cease to be observable.
Assets of consolidated VIEs
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 of the VIE, we maximize the use of observable inputs over unobservable inputs. The individual assets of a VIE are inherently incapable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Because our methodology for valuing these assets does not value the individual assets of a VIE, but rather uses the value of the VIE liabilities as an indicator of the fair value of VIE assets as a whole, we have determined that our valuations of VIE assets in their entirety should be classified in Level III of the fair value hierarchy.
Fair Value Only Disclosed
We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:
Loans held-for-investment and loans held-for-sale
We estimate the fair values of our loans not carried at fair value on a recurring basis by discounting their expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the financial statements. Since these inputs are unobservable, we have determined that the fair value of these loans in their entirety would be classified in Level III of the fair value hierarchy.
HTM debt securities
We estimate the fair value of our mandatorily redeemable preferred equity interests in commercial real estate companies and infrastructure bonds using the same methodology described for our loans held-for-investment. We estimate the fair value of our HTM CMBS using the same methodology described for our CMBS carried at fair value on a recurring basis.
Secured financing agreements, CLOs and SASB
The fair value of the secured financing agreements, CLOs and SASB are determined by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if executed in the current market. We have determined that our valuation of these instruments should be classified in Level III of the fair value hierarchy.
Unsecured senior notes
The fair value of our unsecured senior notes is determined based on the last available bid price for the respective notes in the current market. As these prices represent observable market data, we have determined that the fair value of these instruments would be classified in Level II of the fair value hierarchy.
The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the consolidated balance sheets by their level in the fair value hierarchy as of March 31, 2022 and December 31, 2021 (amounts in thousands):
The changes in financial assets and liabilities classified as Level III are as follows for the three months ended March 31, 2022 and 2021 (amounts in thousands):
Three Months Ended March 31, 2022
Loans at Fair Value
RMBS
CMBS
Woodstar Fund Investments
Domestic Servicing Rights
VIE Assets
VIE Liabilities
Total
January 1, 2022 balance
$
2,936,025
$
143,980
$
22,244
$
1,040,309
$
16,780
$
61,280,543
$
(4,780,221)
$
60,659,660
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale
(125,783)
—
(692)
223,851
1,084
(3,896,602)
474,911
(3,323,231)
Net accretion
—
2,605
—
—
—
—
—
2,605
Included in OCI
—
(5,284)
—
—
—
—
—
(5,284)
Purchases / Originations
2,266,699
—
—
—
—
—
—
2,266,699
Sales
(2,278,467)
—
—
—
—
—
—
(2,278,467)
Cash repayments / receipts
(58,434)
(6,895)
(224)
—
—
—
(410)
(65,963)
Transfers into Level III
93
—
—
—
—
—
(203,880)
(203,787)
Transfers out of Level III
(373,111)
—
—
—
—
—
54,610
(318,501)
Consolidation of VIEs
—
—
—
—
—
1,109,614
(1,025,257)
84,357
Deconsolidation of VIEs balance
—
—
530
—
—
(730,012)
959
(728,523)
March 31, 2022 balance
$
2,367,022
$
134,406
$
21,858
$
1,264,160
$
17,864
$
57,763,543
$
(5,479,288)
$
56,089,565
Amount of unrealized gains (losses) attributable to
assets still held at March 31, 2022:
Included in earnings
$
(82,883)
$
2,605
$
(162)
$
223,851
$
1,084
$
(3,896,602)
$
474,911
$
(3,277,196)
Included in OCI
$
—
$
(5,284)
$
—
$
—
$
—
$
—
$
—
$
(5,284)
Three Months Ended March 31, 2021
Loans at Fair Value
RMBS
CMBS
Woodstar Fund Investments
Domestic Servicing Rights
VIE Assets
VIE Liabilities
Total
January 1, 2021 balance
$
1,022,979
$
167,349
$
19,457
$
—
$
13,202
$
64,238,328
$
(2,019,876)
$
63,441,439
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale
(9,478)
—
372
—
(796)
(2,264,591)
65,681
(2,208,812)
Net accretion
—
2,606
—
—
—
—
—
2,606
Included in OCI
—
(2,403)
—
—
—
—
—
(2,403)
Purchases / Originations
375,270
—
—
—
—
—
—
375,270
Sales
(571,927)
—
—
—
—
—
—
(571,927)
Issuances
—
—
—
—
—
—
(11,604)
(11,604)
Cash repayments / receipts
(53,071)
(7,251)
(573)
—
—
—
(1,137)
(62,032)
Transfers into Level III
—
—
—
—
—
—
(409,267)
(409,267)
Transfers out of Level III
—
—
—
—
—
—
148,775
148,775
Consolidation of VIEs
—
—
—
—
—
393,373
—
393,373
March 31, 2021 balance
$
763,773
$
160,301
$
19,256
$
—
$
12,406
$
62,367,110
$
(2,227,428)
$
61,095,418
Amount of unrealized gains (losses) attributable to
assets still held at March 31, 2021:
Included in earnings
$
(7,708)
$
2,606
$
372
$
—
$
(796)
$
(2,264,591)
$
65,681
$
(2,204,436)
Included in OCI
$
—
$
(2,403)
$
—
$
—
$
—
$
—
$
—
$
(2,403)
Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.
The following table presents the fair values of our financial instruments not carried at fair value on the consolidated balance sheets (amounts in thousands):
March 31, 2022
December 31, 2021
Carrying Value
Fair Value
Carrying Value
Fair Value
Financial assets not carried at fair value:
Loans held-for-investment
$
16,197,636
$
16,204,044
$
15,477,624
$
15,526,235
HTM debt securities
701,306
673,999
683,136
656,864
Financial liabilities not carried at fair value:
Secured financing agreements, CLOs and SASB
$
15,329,466
$
15,356,458
$
15,192,966
$
15,266,440
Unsecured senior notes
2,322,630
2,320,231
1,828,590
1,893,065
The following is quantitative information about significant unobservable inputs in our Level III measurements for those assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
Carrying Value at
March 31, 2022
Valuation Technique
Unobservable Input
Range (Weighted Average) as of (1)
March 31, 2022
December 31, 2021
Loans under fair value option
$
2,367,022
Discounted cash flow, market pricing
Coupon (d)
2.8% - 9.2% (4.4%)
2.6% - 9.2% (4.2%)
Remaining contractual term (d)
6.0 - 39.9 years (28.9 years)
6.3 - 39.9 years (27.4 years)
FICO score (a)
584 - 829 (745)
582 - 829 (748)
LTV (b)
4% - 94% (68%)
1% - 94% (66%)
Purchase price (d)
80.0% - 108.6% (102.0%)
80.0% - 108.6% (102.3%)
RMBS
134,406
Discounted cash flow
Constant prepayment rate (a)
4.2% - 19.6% (9.3%)
4.8% - 19.2% (9.9%)
Constant default rate (b)
0.8% - 6.3% (2.0%)
0.8% - 6.0% (2.1%)
Loss severity (b)
0% - 81% (24%) (f)
0% - 86% (26%) (f)
Delinquency rate (c)
11% - 36% (18%)
10.4% - 35% (19%)
Servicer advances (a)
22% - 79% (52%)
19% - 83% (52%)
Annual coupon deterioration (b)
0% - 2.5% (0.1%)
0% - 1.7% (0.1%)
Putback amount per projected total collateral loss (e)
(1)Unobservable inputs were weighted by the relative carrying value of the instruments as of March 31, 2022 and December 31, 2021.
Information about Uncertainty of Fair Value Measurements
(a)Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.
(b)Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(c)Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (higher or lower) fair value measurement depending on the structural features of the security in question.
(d)This unobservable input is not subject to variability as of the respective reporting dates.
(e)Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our RMBS portfolio.
(f)11% and 18% of the portfolio falls within a range of 45% - 80% as of March 31, 2022 and December 31, 2021, respectively.
21. Income Taxes
Certain of our domestic subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.
Our TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing mortgage loans, and investing in entities which engage in real estate-related operations. As of March 31, 2022 and December 31, 2021, approximately $3.1 billion and $3.2 billion, respectively, of assets were owned by TRS entities. Our TRSs are not consolidated for U.S. federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.
The following table is a reconciliation of our U.S. federal income tax provision determined using our statutory federal tax rate to our reported income tax (benefit) provision for the three months ended March 31, 2022 and 2021 (dollars in thousands):
As of March 31, 2022, our Commercial and Residential Lending Segment had future commercial loan funding commitments totaling $3.1 billion, of which we expect to fund $2.8 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Additionally, as of March 31, 2022, our Commercial and Residential Lending Segment had outstanding residential loan purchase commitments of $1.2 billion. As discussed in Note 12, during the three months ended March 31, 2022, our Commercial and Residential Lending Segment sold $745.0 million of agency-eligible residential loans at face amount which is subject to a post-closing contingent sales price adjustment based on the gain or loss to the purchaser/securitization underwriter, less underwriting costs, if those loans are sold into a future securitization.
As of March 31, 2022, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $147.2 million, including $135.1 million under revolvers and letters of credit (“LCs”), and $12.1 million under delayed draw term loans. As of March 31, 2022, $8.1 million of revolvers and LCs were outstanding. Additionally, as of March 31, 2022, our Infrastructure Lending Segment had outstanding loan purchase commitments of $20.6 million.
In connection with the Infrastructure Lending Segment acquisition, we assumed guarantees of certain borrowers’ performance under existing interest rate swaps. As of March 31, 2022, we had four outstanding guarantees on interest rate swaps maturing between August 2022 and June 2025. Refer to Note 13 for further discussion.
Generally, funding commitments are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are made to the borrower.
Management is not aware of any other contractual obligations, legal proceedings, or any other contingent obligations incurred in the normal course of business that would have a material adverse effect on our consolidated financial statements.
In its operation of the business, management, including our chief operating decision maker, who is our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis prior to the impact of consolidating securitization VIEs under ASC 810. The segment information within this Note is reported on that basis.
The table below presents our results of operations for the three months ended March 31, 2022 by business segment (amounts in thousands):
Commercial and Residential Lending Segment
Infrastructure Lending Segment
Property Segment
Investing and Servicing Segment
Corporate
Subtotal
Securitization VIEs
Total
Revenues:
Interest income from loans
$
202,470
$
26,983
$
—
$
4,166
$
—
$
233,619
$
—
$
233,619
Interest income from investment securities
20,836
747
—
27,389
—
48,972
(34,989)
13,983
Servicing fees
136
—
—
14,071
—
14,207
(4,215)
9,992
Rental income
1,686
—
22,365
7,529
—
31,580
—
31,580
Other revenues
52
68
50
4,654
—
4,824
(6)
4,818
Total revenues
225,180
27,798
22,415
57,809
—
333,202
(39,210)
293,992
Costs and expenses:
Management fees
277
—
—
—
55,018
55,295
—
55,295
Interest expense
68,602
11,930
6,081
6,210
33,842
126,665
(214)
126,451
General and administrative
11,602
3,511
1,056
23,443
4,628
44,240
81
44,321
Acquisition and investment pursuit costs
499
1
5
(83)
—
422
—
422
Costs of rental operations
519
—
5,001
3,770
—
9,290
—
9,290
Depreciation and amortization
294
105
8,219
3,029
—
11,647
—
11,647
Credit loss reversal, net
(3,299)
(359)
—
—
—
(3,658)
—
(3,658)
Other expense
—
—
55
—
—
55
—
55
Total costs and expenses
78,494
15,188
20,417
36,369
93,488
243,956
(133)
243,823
Other income (loss):
Change in net assets related to consolidated VIEs
—
—
—
—
—
—
26,749
26,749
Change in fair value of servicing rights
—
—
—
(217)
—
(217)
1,301
1,084
Change in fair value of investment securities, net
(2,105)
—
—
(9,291)
—
(11,396)
11,041
(355)
Change in fair value of mortgage loans, net
(116,228)
—
—
(9,555)
—
(125,783)
—
(125,783)
Income from affordable housing fund investments
—
—
234,041
—
—
234,041
—
234,041
(Loss) earnings from unconsolidated entities
(1,340)
345
—
151
—
(844)
(66)
(910)
Gain on sale of investments and other assets, net
86,610
—
—
11,858
—
98,468
—
98,468
Gain (loss) on derivative financial instruments, net
118,395
632
17,546
27,863
(37,168)
127,268
—
127,268
Foreign currency (loss) gain, net
(27,254)
(28)
1
—
—
(27,281)
—
(27,281)
Loss on extinguishment of debt
(206)
(469)
—
(148)
—
(823)
—
(823)
Other (loss) income, net
(788)
—
—
—
—
(788)
25
(763)
Total other income (loss)
57,084
480
251,588
20,661
(37,168)
292,645
39,050
331,695
Income (loss) before income taxes
203,770
13,090
253,586
42,101
(130,656)
381,891
(27)
381,864
Income tax benefit (provision)
5,140
4
—
(2,694)
—
2,450
—
2,450
Net income (loss)
208,910
13,094
253,586
39,407
(130,656)
384,341
(27)
384,314
Net income attributable to non-controlling interests
(3)
—
(52,411)
(7,328)
—
(59,742)
27
(59,715)
Net income (loss) attributable to Starwood Property Trust, Inc.
Our significant events subsequent to March 31, 2022 were as follows:
Employee Stock Purchase Plan (“ESPP”)
In April 2022, the Company’s shareholders approved the ESPP, which allows eligible employees to purchase common stock of the Company at a discounted purchase price. The maximum discounted purchase price of a share of the Company's common stock is 85% of the fair market value at the lower of the beginning or the end of the quarterly offering period. Participants may purchase shares not exceeding an aggregate fair market value of $25,000 in any calendar year. The maximum aggregate number of shares subject to issuance in accordance with the ESPP is 2,000,000 shares.
2022 Equity Plans
In April 2022, the Company’s shareholders approved the 2022 Manager Equity Plan and 2022 Equity Plan (collectively, the “2022 Plans”), which allow for the issuance of up to 18,700,000 stock options, stock appreciation rights, RSAs, RSUs or other equity-based awards or any combination thereof to the Manager, directors, employees, advisors, consultants or any other third party providing services to the Company. The 2022 Plans replaced the 2017 Manager Equity Plan and 2017 Equity Plan.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the information included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (our “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.
Overview
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 mortgage loans and other real estate investments in the United States (“U.S.”), Europe and Australia. 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 four reportable business segments as of March 31, 2022 and we refer to the investments within these segments as our target assets:
•Real estate commercial and residential lending (the “Commercial and Residential Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, non-agency residential mortgages (“residential loans”), subordinated mortgages, mezzanine loans, preferred equity, commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities (“RMBS”) and other real estate and real estate-related debt investments in the U.S., Europe and Australia (including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on residential property and primarily consist of non-agency residential loans that are not guaranteed by any U.S. Government agency or federally chartered corporation.
•Infrastructure lending (the “Infrastructure Lending Segment”)—engages primarily in originating, acquiring, financing and managing infrastructure debt investments.
•Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multifamily properties and commercial properties subject to net leases, 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.
Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).
Refer to Note 1 of our condensed consolidated financial statements included herein (the “Condensed Consolidated Financial Statements”) for further discussion of our business and organization.
COVID-19 Pandemic
The full extent of the impact and effects of the COVID-19 pandemic will depend on future developments, including, among other factors, the duration, spread and resurgences of the virus, including variants thereof, along with related travel advisories and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, the pace, scope and efficacy of vaccination and booster programs, and general uncertainty as to the impact of COVID-19, including variants and resurgences, on the global economy.
Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of our Form 10-K.
•Originated or acquired $1.9 billion of commercial loans during the quarter, including the following:
◦$263.6 million of first mortgage loans for the acquisition of a 1,828 unit portfolio of eight multifamily properties located in Texas, of which the Company funded $236.1 million.
◦$250.0 million participation in a first mortgage loan for the construction of 235 luxury residences, a 136-key hotel and 78,000 square feet of commercial space located in New York, of which the Company funded $142.4 million.
◦$200.0 million first mortgage loan to refinance existing debt on a 22 property luxury cabin portfolio and finance the acquisition of 18 future properties located across the U.S., of which the Company funded $84.5 million.
◦€162.7 million ($186.2 million) first mortgage loan for the acquisition of a 382,000 square foot office and retail property located in Berlin, Germany, which the Company has not yet funded.
◦$165.0 million first mortgage and mezzanine loan for the construction of a 65-story 100% pre-sold residential project located in South Florida, of which the Company funded $17.8 million.
◦$111.9 million first mortgage and mezzanine loan for the acquisition of a 348 unit, mid-rise multifamily property located in Arizona, of which the Company funded $102.9 million.
•In February 2022, we refinanced a pool of our commercial loans held-for-investment through a collateralized loan obligation ("CLO"), STWD 2022-FL3. The CLO has a contractual maturity of November 2038 and a weighted average cost of financing of SOFR + 1.91%, inclusive of the amortization of deferred issuance costs. On the closing date, the CLO issued $1.0 billion of notes and preferred shares, of which $842.5 million of notes were purchased by third party investors. We retained $82.5 million of notes, along with preferred shares with a liquidation preference of $75.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash for a period of two years.
•Sold commercial real estate in Florida that was previously acquired through foreclosure in April 2019 for gross proceeds of $114.8 million and recognized a gain of $86.6 million.
•Entered into or amended commercial loan repurchase facilities to increase the available borrowings by $1.1 billion.
•Funded $240.9 million of previously originated commercial loan commitments.
•Received gross proceeds of $715.6 million ($382.2 million, net of debt repayments) from maturities and principal repayments on our commercial loans.
•Acquired $1.8 billion of residential loans.
•Received proceeds of $1.9 billion, including retained RMBS of $84.4 million, from the securitization and sales of $1.9 billion of residential loans.
•Amended a residential loan repurchase facility to increase the available borrowings by $250 million. The margin call provisions under this facility do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks.
Infrastructure Lending Segment
•In January 2022, we refinanced a pool of our infrastructure loans held-for-investment through a CLO, STWD 2021-SIF2. The CLO has a contractual maturity of January 2033 and a weighted average cost of financing of SOFR + 2.11%, inclusive of the amortization of deferred issuance costs. On the closing date, the CLO issued $500.0 million of notes and preferred shares, of which $410.0 million of notes was purchased by third party investors. We retained
preferred shares with a liquidation preference of $90.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash for a period of three years.
•Acquired $231.4 million of infrastructure loans and bonds and funded $8.7 million of pre-existing infrastructure loan commitments.
•Received proceeds of $92.6 million from principal repayments on our infrastructure loans and bonds.
Investing and Servicing Segment
•Originated commercial conduit loans of $450.4 million.
•Received proceeds of $342.1 million from sales of previously originated commercial conduit loans and priced $320.1 million of previously originated commercial conduit loans in two securitizations that settled subsequent to March 31, 2022.
•Obtained six new special servicing assignments for CMBS trusts with a total unpaid principal balance of $5.8 billion, bringing our total named special servicing portfolio to $98.0 billion.
•Sold commercial real estate for gross proceeds of $34.5 million and recognized a total gain of $11.7 million.
Corporate
•Issued $500.0 million of 4.375% Senior Notes due 2027 (the “2027 Senior Notes”) and swapped the notes to a floating rate of SOFR + 2.95%.
Subsequent Events
Refer to Note 24 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to March 31, 2022.
The discussion below is based on accounting principles generally accepted in the United States of America (“GAAP”) and therefore reflects the elimination of certain key financial statement line items related to the consolidation of securitization variable interest entities (“VIEs”), particularly within revenues and other income, as discussed in Note 2 to the Condensed Consolidated Financial Statements. For a discussion of our results of operations excluding the impact of Accounting Standards Codification (“ASC”) Topic 810 as it relates to the consolidation of securitization VIEs, refer to the section captioned “Non-GAAP Financial Measures”
The following table compares our summarized results of operations for the three months ended March 31, 2022, December 31, 2021 and March 31, 2021 by business segment (amounts in thousands):
$ Change
$ Change
For the Three Months Ended
March 31, 2022 vs.
March 31, 2022 vs.
Revenues:
March 31, 2022
December 31, 2021
March 31, 2021
December 31, 2021
March 31, 2021
Commercial and Residential Lending Segment
$
225,180
$
207,255
$
190,531
$
17,925
$
34,649
Infrastructure Lending Segment
27,798
24,108
19,465
3,690
8,333
Property Segment
22,415
37,713
65,144
(15,298)
(42,729)
Investing and Servicing Segment
57,809
55,693
44,547
2,116
13,262
Corporate
—
—
—
—
—
Securitization VIE eliminations
(39,210)
(35,064)
(32,457)
(4,146)
(6,753)
293,992
289,705
287,230
4,287
6,762
Costs and expenses:
Commercial and Residential Lending Segment
78,494
83,263
56,414
(4,769)
22,080
Infrastructure Lending Segment
15,188
25,434
12,956
(10,246)
2,232
Property Segment
20,417
42,940
59,498
(22,523)
(39,081)
Investing and Servicing Segment
36,369
37,641
32,457
(1,272)
3,912
Corporate
93,488
109,742
71,647
(16,254)
21,841
Securitization VIE eliminations
(133)
(134)
(93)
1
(40)
243,823
298,886
232,879
(55,063)
10,944
Other income (loss):
Commercial and Residential Lending Segment
57,084
15,852
21,161
41,232
35,923
Infrastructure Lending Segment
480
1,713
95
(1,233)
385
Property Segment
251,588
7,422
4,608
244,166
246,980
Investing and Servicing Segment
20,661
59,228
18,960
(38,567)
1,701
Corporate
(37,168)
(4,661)
(6,843)
(32,507)
(30,325)
Securitization VIE eliminations
39,050
34,947
32,424
4,103
6,626
331,695
114,501
70,405
217,194
261,290
Income (loss) before income taxes:
Commercial and Residential Lending Segment
203,770
139,844
155,278
63,926
48,492
Infrastructure Lending Segment
13,090
387
6,604
12,703
6,486
Property Segment
253,586
2,195
10,254
251,391
243,332
Investing and Servicing Segment
42,101
77,280
31,050
(35,179)
11,051
Corporate
(130,656)
(114,403)
(78,490)
(16,253)
(52,166)
Securitization VIE eliminations
(27)
17
60
(44)
(87)
381,864
105,320
124,756
276,544
257,108
Income tax benefit (provision)
2,450
(2,291)
(2,230)
4,741
4,680
Net income attributable to non-controlling interests
(59,715)
(11,580)
(11,148)
(48,135)
(48,567)
Net income attributable to Starwood Property Trust, Inc.
Three Months Ended March 31, 2022 Compared to the Three Months Ended December 31, 2021
Commercial and Residential Lending Segment
Revenues
For the three months March 31, 2022, revenues of our Commercial and Residential Lending Segment increased $17.9 million to $225.2 million, compared to $207.3 million for the three months ended December 31, 2021. This increase was primarily due to an increase in interest income from loans of $12.7 million and investment securities of $4.9 million. The increase in interest income from loans reflects (i) a $9.5 million increase from commercial loans, reflecting higher average balances partially offset by the timing effect of certain loans being placed on nonaccrual and (ii) a $3.2 million increase from residential loans principally due to higher average balances reflecting the timing of purchases and securitizations. The increase in interest income from investment securities was primarily due to higher average commercial and RMBS investment balances as well as higher average yields on RMBS.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Commercial and Residential Lending Segment decreased $4.8 million to $78.5 million, compared to $83.3 million for the three months ended December 31, 2021. This decrease was primarily due to a $12.7 million decrease in credit loss provision, partially offset by a $7.0 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision decreased from a provision of $9.4 million in the fourth quarter of 2021 to a reversal of $3.3 million in the first quarter of 2022. The credit loss reversal in the first quarter of 2022 was primarily due to an improvement in macroeconomic forecasts and its effect on our estimate of current expected credit losses (“CECL”). The increase in interest expense was primarily due to higher average borrowings outstanding.
Net Interest Income (amounts in thousands)
For the Three Months Ended
March 31, 2022
December 31, 2021
Change
Interest income from loans
$
202,470
$
189,723
$
12,747
Interest income from investment securities
20,836
15,971
4,865
Interest expense
(68,602)
(61,636)
(6,966)
Net interest income
$
154,704
$
144,058
$
10,646
For the three months ended March 31, 2022, net interest income of our Commercial and Residential Lending Segment increased $10.6 million to $154.7 million, compared to $144.1 million for the three months ended December 31, 2021. This increase reflects the increase in interest income, partially offset by the increase in interest expense on our secured financing facilities, both as discussed in the sections above.
During the three months ended March 31, 2022 and December 31, 2021, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities, excluding retained RMBS and loans for which interest income is not recognized, were as follows:
For the Three Months Ended
March 31, 2022
December 31, 2021
Commercial
5.2
%
5.3
%
Residential
4.3
%
4.1
%
Overall
5.1
%
5.1
%
The weighted average unlevered yield on our commercial loans decreased slightly primarily due to repayment of loans with higher LIBOR floors being replaced by newer loans with lower floating rate floors and the timing effect of certain loans being placed on nonaccrual. The weighted average unlevered yield on our residential loans increased slightly primarily due to a change in the composition of our residential loan portfolio to include fewer agency loans which generally carry a lower coupon than non-agency loans.
During the three months ended March 31, 2022 and December 31, 2021, the Commercial and Residential Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 2.4% in each period.
For the three months ended March 31, 2022, other income of our Commercial and Residential Lending Segment increased $41.2 million to $57.1 million compared to $15.9 million for the three months ended December 31, 2021. This increase was primarily due to (i) a $104.4 million increase in net gains on derivatives and (ii) an $86.6 million gain on sale of a distribution facility previously acquired in foreclosure, both partially offset by (iii) a $106.0 million unfavorable change in fair value of residential loans, (iv) a $26.9 million increase in foreign currency loss and (v) a $14.0 million unfavorable change in fair value of investment securities, principally related to RMBS. The increase in net gains on derivatives in the first quarter of 2022 reflects a $76.5 million increased gain on interest rate swaps principally related to residential loans and a $27.9 million favorable change in gain (loss) on foreign currency hedges. The interest rate swaps are used primarily to hedge our interest rate risk on residential loans held-for-sale and to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The favorable change in gain (loss) on foreign currency hedges and the increase in foreign currency loss reflect the strengthening of the U.S. dollar against the pound sterling (“GBP”) and Euro (“EUR”), partially offset by a weakening against the Australian dollar (“AUD”), in the first quarter of 2022 compared to a lesser strengthening of the U.S. dollar against the EUR, partially offset by a weakening against the GBP and AUD, in the fourth quarter of 2021.
Infrastructure Lending Segment
Revenues
For the three months ended March 31, 2022, revenues of our Infrastructure Lending Segment increased $3.7 million to $27.8 million, compared to $24.1 million for the three months ended December 31, 2021. This was primarily due to an increase in interest income from loans of $3.5 million reflecting higher average balances and an increase in prepayment related income.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Infrastructure Lending Segment decreased $10.2 million to $15.2 million, compared to $25.4 million for the three months ended December 31, 2021. The decrease was primarily due to an $11.7 million decrease in credit loss provision, partially offset by a $2.2 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. There was a $0.4 million credit loss reversal in the first quarter of 2022 compared to a provision of $11.3 million in the fourth quarter of 2021 which included a $10.1 million specific reserve for a loan which became credit deteriorated in that quarter. The increase in interest expense was primarily due to higher average borrowings outstanding.
Net Interest Income (amounts in thousands)
For the Three Months Ended
March 31, 2022
December 31, 2021
Change
Interest income from loans
$
26,983
$
23,512
$
3,471
Interest income from investment securities
747
531
216
Interest expense
(11,930)
(9,755)
(2,175)
Net interest income
$
15,800
$
14,288
$
1,512
For the three months ended March 31, 2022, net interest income of our Infrastructure Lending Segment increased $1.5 million to $15.8 million, compared to $14.3 million for the three months ended December 31, 2021. The increase reflects the increase in interest income from loans, partially offset by the increase in interest expense on the secured financing facilities, both as discussed in the sections above.
During the three months ended March 31, 2022 and December 31, 2021, the weighted average unlevered yields on the Infrastructure Lending Segment’s loans and investment securities held-for-investment were 5.0% and 4.9%, respectively.
During the three months ended March 31, 2022 and December 31, 2021, the Infrastructure Lending Segment’s weighted average secured borrowing rates, inclusive of the amortization of deferred financing fees, were 2.8% and 2.7%, respectively.
Other Income
For the three months ended March 31, 2022, other income of our Infrastructure Lending Segment decreased $1.2 million to $0.5 million, compared to $1.7 million for the three months ended December 31, 2021. This decrease was primarily
due to a $0.7 million decrease in earnings from an unconsolidated entity and a $0.5 million loss on extinguishment of debt in the first quarter of 2022.
Property Segment
Change in Results by Portfolio (amounts in thousands)
$ Change from prior period
Revenues
Costs and expenses
Gain (loss) on derivative financial instruments
Other income (loss)
Income (loss) before income taxes
Master Lease Portfolio
$
—
$
(51)
$
—
$
—
$
51
Medical Office Portfolio
1,235
696
11,692
—
12,231
Woodstar I Portfolio
(9,651)
(10,825)
(267)
5,141
6,048
Woodstar II Portfolio
(6,882)
(8,380)
—
—
1,498
Woodstar Fund
—
(1,466)
—
227,616
229,082
Other/Corporate
—
(2,497)
—
(16)
2,481
Total
$
(15,298)
$
(22,523)
$
11,425
$
232,741
$
251,391
See Notes 6 and 7 to the Condensed Consolidated Financial Statements for a description of the above-referenced Property Segment portfolios and fund.
Revenues
For the three months ended March 31, 2022, revenues of our Property Segment decreased $15.3 million to $22.4 million, compared to $37.7 million for the three months ended December 31, 2021. The decrease is primarily due to the conversion of the Woodstar Portfolios to the Woodstar Fund on November 5, 2021.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Property Segment decreased $22.5 million to $20.4 million, compared to $42.9 million for the three months ended December 31, 2021 primarily due to the Woodstar Fund conversion referred to above.
Other Income
For the three months ended March 31, 2022, other income of our Property Segment increased $244.2 million to $251.6 million compared to $7.4 million for the three months ended December 31, 2021. The increase is primarily due to (i) a $227.6 million increase in income attributable to investments of the Woodstar Fund, including $218.4 million of unrealized increases in fair value during the first quarter of 2022, (ii) an $11.4 million increased gain on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio and (iii) the nonrecurrence of a $5.1 million loss on extinguishment of debt in the fourth quarter of 2021 related to the refinancing of certain Woodstar properties before their conversion to the Woodstar Fund.
Investing and Servicing Segment
Revenues
For the three months ended March 31, 2022, revenues of our Investing and Servicing Segment increased $2.1 million to $57.8 million, compared to $55.7 million for the three months ended December 31, 2021. The increase primarily reflects higher interest income from CMBS.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Investing and Servicing Segment decreased $1.2 million to $36.4 million, compared to $37.6 million for the three months ended December 31, 2021.
Other Income
For the three months ended March 31, 2022, other income of our Investing and Servicing Segment decreased $38.5 million to $20.7 million, compared to $59.2 million for the three months ended December 31, 2021. The decrease in other
income was primarily due to (i) a $40.1 million unfavorable change in fair value of CMBS investments, (ii) a $20.7 million unfavorable change in fair value of conduit loans and (iii) a $3.7 million unfavorable change in fair value of servicing rights, all partially offset by (iv) a $27.1 million increased net gain on derivatives which primarily hedge our interest rate risk on conduit loans and CMBS investments. The unfavorable change in fair value of CMBS investments was primarily due to the widening of credit spreads in the first quarter of 2022, reflecting current economic uncertainties and an inflationary environment, versus a tightening of credit spreads in the fourth quarter of 2021. The unfavorable change in fair value of conduit loans was more than offset by an increased gain on interest rate swaps which hedged those loans.
Corporate and Other Items
Corporate Costs and Expenses
For the three months ended March 31, 2022, corporate expenses decreased $16.2 million to $93.5 million, compared to $109.7 million for the three months ended December 31, 2021. This was primarily due to (i) a decrease of $21.0 million in management fees principally due to lower incentive fees attributable to nonrecurring transactions, partially offset by (ii) a $4.4 million increase in interest expense on higher average outstanding unsecured senior note balances.
Corporate Other Loss
For the three months ended March 31, 2022, corporate other loss increased $32.5 million to $37.2 million, compared to $4.7 million for the three months ended December 31, 2021. This was due to an increased loss on our fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes.
Securitization VIE Eliminations
Securitization VIE eliminations primarily reclassify interest income and servicing fee revenues to other income (loss) for the CMBS and RMBS VIEs that we consolidate as primary beneficiary. Such eliminations have no overall effect on net income (loss) attributable to Starwood Property Trust. The reclassified revenues, along with applicable changes in fair value of investment securities and servicing rights, comprise the other income (loss) caption “Change in net assets related to consolidated VIEs,” which represents our beneficial interest in those consolidated VIEs. The magnitude of the securitization VIE eliminations is merely a function of the number of CMBS and RMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of operating results. The eliminations primarily relate to CMBS trusts for which the Investing and Servicing Segment is deemed the primary beneficiary and, to a much lesser extent, some CMBS and RMBS trusts for which the Commercial and Residential Lending Segment is deemed the primary beneficiary.
Income Tax Benefit(Provision)
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in taxable REIT subsidiaries (“TRSs”). For the three months ended March 31, 2022 our income tax provision decreased $4.7 million to a benefit of $2.4 million compared to a provision of $2.3 million for the three months ended December 31, 2021 due to tax losses of our TRSs in the first quarter of 2022 compared to taxable income of our TRSs in the fourth quarter of 2021. The tax losses were primarily attributable to net unrealized losses on our residential loans during the first quarter of 2022.
Net Income Attributable to Non-controlling Interests
During the three months ended March 31, 2022, net income attributable to non-controlling interests increased $48.1 million to $59.7 million, compared to $11.6 million during the three months ended December 31, 2021. The increase was primarily due to non-controlling interests in increased earnings of the Woodstar Fund.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Commercial and Residential Lending Segment
Revenues
For the three months ended March 31, 2022, revenues of our Commercial and Residential Lending Segment increased $34.7 million to $225.2 million, compared to $190.5 million for the three months ended March 31, 2021. This increase was primarily due to increases in interest income from loans of $31.9 million and investment securities of $2.5 million. The increase in interest income from loans reflects (i) a $17.2 million increase from commercial loans, reflecting higher average balances partially offset by lower prepayment related income and the timing effect of certain loans being placed on nonaccrual and (ii) a $14.7 million increase from residential loans principally due to higher average balances reflecting the timing of purchases and securitizations. The increase in interest income from investment securities was primarily due to higher commercial and RMBS average investment balances as well as higher average yields on RMBS.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Commercial and Residential Lending Segment increased $22.1 million to $78.5 million, compared to $56.4 million for the three months ended March 31, 2021. This increase was primarily due to a $24.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by a $2.8 million increase in credit loss reversal. The increase in interest expense was primarily due to higher average borrowings outstanding. The increase in the credit loss reversal was primarily due to an improvement in macroeconomic forecasts during the three months ended March 31, 2022.
Net Interest Income (amounts in thousands)
For the Three Months Ended March 31,
2022
2021
Change
Interest income from loans
$
202,470
$
170,593
$
31,877
Interest income from investment securities
20,836
18,385
2,451
Interest expense
(68,602)
(44,295)
(24,307)
Net interest income
$
154,704
$
144,683
$
10,021
For the three months ended March 31, 2022, net interest income of our Commercial and Residential Lending Segment increased $10.0 million to $154.7 million, compared to $144.7 million for the three months ended March 31, 2021. This increase reflects the increase in interest income, partially offset by the increase in interest expense on our secured financing facilities, both as discussed in the sections above.
During the three months ended March 31, 2022 and 2021, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities, excluding retained RMBS and loans for which interest income is not recognized, were as follows:
For the Three Months Ended March 31,
2022
2021
Commercial
5.2
%
6.0
%
Residential
4.3
%
6.1
%
Overall
5.1
%
6.0
%
The weighted average unlevered yield on our commercial loans decreased primarily due to repayment of loans with higher LIBOR floors being replaced by newer loans with lower floating rate floors, lower prepayment related income and the timing effect of certain loans being placed on nonaccrual. The unlevered yield on our residential loans decreased due to lower weighted average coupons which resulted from market spread tightening as well as a change in the composition of our residential loan portfolio to include agency loans which generally carry a lower coupon than non-agency loans.
During the three months ended March 31, 2022 and 2021, the Commercial and Residential Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 2.4% and 2.6%, respectively. The decrease in borrowing rates primarily reflects decreases in weighted average
spreads particularly due to increased use of lower cost CLO financing, partially offset by higher LIBOR and other applicable reference rates.
Other Income
For the three months ended March 31, 2022, other income of our Commercial and Residential Lending Segment increased $35.9 million to $57.1 million, compared to $21.2 million for the three months ended March 31, 2021. This increase primarily reflects (i) a $92.3 million increase in gains on derivatives and (ii) a $68.9 million increased gain on sale of foreclosed properties, both partially offset by (iii) a $105.5 million greater decrease in fair value of residential loans, (iv) a $15.7 million increase in foreign currency loss and (v) a $3.0 million unfavorable change in earnings (loss) from an unconsolidated residential mortgage originator. The increased gains on derivatives during the three months ended March 31, 2022 reflect an $81.7 million increased gain on interest rate swaps principally related to residential loans and a $10.6 million increased gain on foreign currency hedges. The interest rate swaps are used primarily to hedge our interest rate risk on residential loans held-for-sale and to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The increased gain on foreign currency hedges and the increase in foreign currency loss reflect the strengthening of the U.S. dollar against the GBP and EUR, partially offset by a weakening against the AUD, during the three months ended March 31, 2022 compared to a lesser overall strengthening of the U.S. dollar against the EUR and AUD, partially offset by a weakening against the GBP, during the three months ended March 31, 2021.
Infrastructure Lending Segment
Revenues
For the three months ended March 31, 2022, revenues of our Infrastructure Lending Segment increased $8.3 million to $27.8 million, compared to $19.5 million for the three months ended March 31, 2021. This was primarily due to an increase in interest income from loans of $8.2 million principally due to higher average balances and an increase in prepayment related income.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Infrastructure Lending Segment increased $2.2 million to $15.2 million, compared to $13.0 million for the three months ended March 31, 2021. The increase was primarily due to (i) a $3.1 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by (ii) a $0.9 million favorable change in credit loss provision from a $0.6 million provision in the first quarter of 2021 to a $0.3 million reversal in the first quarter of 2022. The increase in interest expense was primarily due to higher average borrowings outstanding.
Net Interest Income (amounts in thousands)
For the Three Months Ended March 31,
2022
2021
Change
Interest income from loans
$
26,983
$
18,808
$
8,175
Interest income from investment securities
747
564
183
Interest expense
(11,930)
(8,841)
(3,089)
Net interest income
$
15,800
$
10,531
$
5,269
For the three months ended March 31, 2022, net interest income of our Infrastructure Lending Segment increased $5.3 million to $15.8 million, compared to $10.5 million for the three months ended March 31, 2021. The increase reflects the increase in interest income from loans, partially offset by the increase in interest expense on the secured financing facilities, both as discussed in the sections above.
During the three months ended March 31, 2022 and 2021, the weighted average unlevered yields on the Infrastructure Lending Segment’s loans and investment securities held-for-investment were 5.0% and 4.8%, respectively.
During the three months ended March 31, 2022 and 2021, the Infrastructure Lending Segment’s weighted average secured borrowing rates, inclusive of the amortization of deferred financing fees, were 2.8% and 2.9%, respectively.
For the three months ended March 31, 2022 and 2021, other income of our Infrastructure Lending Segment increased $0.4 million to $0.5 million, compared to $0.1 million for the three months ended March 31, 2021. The increase primarily reflects a $0.6 million increase in earnings from an unconsolidated entity.
Property Segment
Change in Results by Portfolio (amounts in thousands)
$ Change from prior period
Revenues
Costs and expenses
Gain (loss) on derivative financial instruments
Other income (loss)
Income (loss) before income taxes
Master Lease Portfolio
$
—
$
(30)
$
—
$
—
$
30
Medical Office Portfolio
(284)
(436)
12,943
—
13,095
Woodstar I Portfolio
(24,378)
(22,077)
(122)
—
(2,423)
Woodstar II Portfolio
(18,067)
(16,726)
—
141
(1,200)
Woodstar Fund
—
521
—
234,041
233,520
Other/Corporate
—
(333)
—
(23)
310
Total
$
(42,729)
$
(39,081)
$
12,821
$
234,159
$
243,332
Revenues
For the three months ended March 31, 2022, revenues of our Property Segment decreased $42.7 million to $22.4 million, compared to $65.1 million for the three months ended March 31, 2021. The decrease is primarily due to the conversion of the Woodstar Portfolios to the Woodstar Fund on November 5, 2021.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Property Segment decreased $39.1 million to $20.4 million, compared to $59.5 million for the three months ended March 31, 2021, primarily due to the Woodstar Fund conversion referred to above.
Other Income
For the three months ended March 31, 2022, other income of our Property Segment increased $247.0 million to $251.6 million, compared to $4.6 million for the three months ended March 31, 2021. The increase is primarily due to (i) $234.0 million of income attributable to investments of the Woodstar Fund, including $218.4 million of unrealized increases in fair value, during the first quarter of 2022 and (ii) a $12.8 million increased gain on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio
Investing and Servicing Segment
Revenues
For the three months ended March 31, 2022, revenues of our Investing and Servicing Segment increased $13.3 million to $57.8 million, compared to $44.5 million for the three months ended March 31, 2021. The increase in revenues was primarily due to (i) a $9.4 million increase in interest income from CMBS investments and conduit loans, including a $6.4 million increase in interest recoveries from CMBS, (ii) a $4.6 million increase in other fee income related to the origination of certain loans contributed into CMBS transactions and (iii) a $1.6 million increase in servicing fees, all partially offset by (iv) a $2.4 million decrease in rental income principally reflecting fewer properties held.
Costs and Expenses
For the three months ended March 31, 2022, costs and expenses of our Investing and Servicing Segment increased $3.9 million to $36.4 million, compared to $32.5 million for the three months ended March 31, 2021. The increase in costs and expenses was primarily due to an increase of $5.0 million in general and administrative expenses principally reflecting increased incentive compensation due to higher securitization net income.
For the three months ended March 31, 2022, other income of our Investing and Servicing Segment increased $1.7 million to $20.7 million, compared to $19.0 million for the three months ended March 31, 2021. The increase in other income was primarily due to (i) an $18.6 million increased gain on derivatives which primarily hedge our interest rate risk on conduit loans and CMBS investments and (ii) an $11.7 million gain on sale of an operating property, both partially offset by (iii) a $16.5 million unfavorable change in fair value of CMBS investments and (iv) a $10.8 million unfavorable change in fair value of conduit loans. The unfavorable change in fair value of conduit loans was more than offset by an increased gain on interest rate swaps which hedged those loans.
Corporate and Other Items
Corporate Costs and Expenses
For the three months ended March 31, 2022, corporate expenses increased $21.9 million to $93.5 million, compared to $71.6 million for the three months ended March 31, 2021. This increase was primarily due to increases of (i) $16.8 million in management fees, primarily reflecting higher incentive fees principally related to operating property sales and (ii) $4.7 million in interest expense on higher average outstanding term loan and unsecured senior note balances.
Corporate Other Loss
For the three months ended March 31, 2022, corporate other loss increased $30.4 million to $37.2 million, compared to $6.8 million for the three months ended March 31, 2021. This was due to an increased loss on fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes.
Securitization VIE Eliminations
Refer to the preceding comparison of the three months ended March 31, 2022 to the three months ended December 31, 2021 for a discussion of the effect of securitization VIE eliminations.
Income Tax Benefit (Provision)
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in TRSs. For the three months ended March 31, 2022, our income tax provision decreased $4.6 million to a benefit of $2.4 million, compared to a provision of $2.2 million for the three months ended March 31, 2021 due to tax losses of our TRSs in the first quarter of 2022 compared to taxable income of our TRSs in the first quarter of 2021. The tax losses were primarily attributable to net unrealized losses on our residential loans during the first quarter of 2022.
Net Income Attributable to Non-controlling Interests
For the three months ended March 31, 2022, net income attributable to non-controlling interests increased $48.6 million to $59.7 million, compared to $11.1 million for the three months ended March 31, 2021. The increase was primarily due to non-controlling interests in earnings of the Woodstar Fund during the first quarter of 2022.
Distributable Earnings is a non-GAAP financial measure. We calculate Distributable Earnings as GAAP net income (loss) excluding the following:
(i)non-cash equity compensation expense;
(ii)incentive fees due under our management agreement;
(iii)depreciation and amortization of real estate and associated intangibles;
(iv)acquisition costs associated with successful acquisitions;
(v)any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); and
(vi)any deductions for distributions payable with respect to equity securities of subsidiaries issued in exchange for properties or interests therein.
The CECL reserve has been excluded from Distributable Earnings consistent with other unrealized gains (losses) pursuant to our existing policy for reporting Distributable Earnings. We expect to only recognize such potential credit losses in Distributable Earnings if and when such amounts are deemed nonrecoverable upon a realization event. This is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold, but non-recoverability may also be determined if, in our determination, it is nearly certain that all amounts due will not be collected. The realized loss amount reflected in Distributable Earnings will equal the difference between the cash received, or expected to be received, and the book value of the asset, and is reflective of our economic experience as it relates to the ultimate realization of the loan.
We believe that Distributable Earnings provides meaningful information to consider in addition to our net income (loss) and cash flow from operating activities determined in accordance with GAAP. We believe Distributable Earnings is a useful financial metric for existing and potential future holders of our common stock as historically, over time, Distributable Earnings has been a strong indicator of our dividends per share. As a REIT, we generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments, and therefore we believe our dividends are one of the principal reasons stockholders may invest in our common stock. Further, Distributable Earnings helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations, and is a performance metric we consider when declaring our dividends. We also use Distributable Earnings (previously defined as “Core Earnings”) to compute the incentive fee due under our management agreement.
Distributable Earnings does not represent net income (loss) or cash generated from operating activities and should not be considered as an alternative to GAAP net income (loss), or an indication of our GAAP cash flows from operations, a measure of our liquidity, taxable income, or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.
The weighted average diluted share count applied to Distributable Earnings for purposes of determining Distributable Earnings per share (“EPS”) is computed using the GAAP diluted share count, adjusted for the following:
(i)Unvested stock awards – Currently, unvested stock awards are excluded from the denominator of GAAP EPS. The related compensation expense is also excluded from Distributable Earnings. In order to effectuate dilution from these awards in the Distributable Earnings computation, we adjust the GAAP diluted share count to include these shares.
(ii)Convertible Notes – Conversion of our Convertible Notes is an event that is contingent upon numerous factors, none of which are in our control, and is an event that may or may not occur. Consistent with the treatment of other unrealized adjustments to Distributable Earnings, we adjust the GAAP diluted share count to exclude the potential shares issuable upon conversion until a conversion occurs.
(iii)Subsidiary equity – The intent of a February 2018 amendment to our management agreement (the “Amendment”) is to treat subsidiary equity in the same manner as if parent equity had been issued. The Class A Units issued in connection with the acquisition of assets in our Woodstar II Portfolio are currently excluded from our GAAP diluted share count, with the subsidiary equity represented as non-controlling interests in consolidated subsidiaries on our GAAP balance sheet. Consistent with the Amendment, we adjust GAAP diluted share count to include these subsidiary units.
The following table presents our diluted weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Distributable EPS calculation (amounts in thousands):
For the Three Months Ended
March 31, 2022
December 31, 2021
March 31, 2021
Diluted weighted average shares - GAAP EPS
313,329
300,784
293,231
Add: Unvested stock awards
3,695
3,852
4,484
Add: Woodstar II Class A Units
9,773
9,773
10,622
Less: Convertible Notes dilution
(9,649)
(9,649)
(9,649)
Diluted weighted average shares - Distributable EPS
317,148
304,760
298,688
The definition of Distributable Earnings allows management to make adjustments, subject to the approval of a majority of our independent directors, in situations where such adjustments are considered appropriate in order for Distributable Earnings to be calculated in a manner consistent with its definition and objective. No adjustments to the definition of Distributable Earnings became effective during the three months ended March 31, 2022.
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended March 31, 2022, by business segment (amounts in thousands, except per share data):
Commercial and Residential Lending Segment
Infrastructure Lending Segment
Property Segment
Investing and Servicing Segment
Corporate
Total
Revenues
$
225,180
$
27,798
$
22,415
$
57,809
$
—
$
333,202
Costs and expenses
(78,494)
(15,188)
(20,417)
(36,369)
(93,488)
(243,956)
Other income (loss)
57,084
480
251,588
20,661
(37,168)
292,645
Income (loss) before income taxes
203,770
13,090
253,586
42,101
(130,656)
381,891
Income tax benefit (provision)
5,140
4
—
(2,694)
—
2,450
Income attributable to non-controlling interests
(3)
—
(52,411)
(7,328)
—
(59,742)
Net income (loss) attributable to Starwood Property Trust, Inc.
208,907
13,094
201,175
32,079
(130,656)
324,599
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units
—
—
4,691
—
—
4,691
Non-controlling interests attributable to unrealized gains/losses
—
—
44,902
2,556
—
47,458
Non-cash equity compensation expense
2,417
297
58
1,275
6,046
10,093
Management incentive fee
—
—
—
—
28,955
28,955
Acquisition and investment pursuit costs
(298)
—
(78)
(169)
—
(545)
Depreciation and amortization
234
95
8,292
3,152
—
11,773
Interest income adjustment for securities
2,490
—
—
(1,708)
—
782
Extinguishment of debt, net
—
—
—
—
(246)
(246)
Other non-cash items
3
—
456
122
—
581
Reversal of GAAP unrealized (gains) / losses on:
Loans
116,228
—
—
9,555
—
125,783
Credit loss reversal, net
(3,299)
(359)
—
—
—
(3,658)
Securities
2,105
—
—
9,291
—
11,396
Woodstar Fund investments
—
—
(234,041)
—
—
(234,041)
Derivatives
(121,172)
(685)
(19,170)
(29,089)
40,773
(129,343)
Foreign currency
27,254
28
(1)
—
—
27,281
(Earnings) loss from unconsolidated entities
1,340
(345)
—
(151)
—
844
Sales of properties
(86,610)
—
—
(11,858)
—
(98,468)
Recognition of Distributable realized gains /
(losses) on:
Loans
(36,208)
—
—
(10,561)
—
(46,769)
Securities
(2,768)
—
—
26
—
(2,742)
Woodstar Fund investments
—
—
15,659
—
—
15,659
Derivatives
36,893
—
(35)
24,639
—
61,497
Foreign currency
(178)
112
1
—
—
(65)
Earnings (loss) from unconsolidated entities
(1,239)
345
—
470
—
(424)
Sales of properties
84,738
—
—
177
—
84,915
Distributable Earnings (Loss)
$
230,837
$
12,582
$
21,909
$
29,806
$
(55,128)
$
240,006
Distributable Earnings (Loss) per Weighted Average Diluted Share
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended December 31, 2021, by business segment (amounts in thousands, except per share data):
Commercial and Residential Lending Segment
Infrastructure Lending Segment
Property Segment
Investing and Servicing Segment
Corporate
Total
Revenues
$
207,255
$
24,108
$
37,713
$
55,693
$
—
$
324,769
Costs and expenses
(83,263)
(25,434)
(42,940)
(37,641)
(109,742)
(299,020)
Other income (loss)
15,852
1,713
7,422
59,228
(4,661)
79,554
Income (loss) before income taxes
139,844
387
2,195
77,280
(114,403)
105,303
Income tax (provision) benefit
(2,087)
(32)
—
(173)
1
(2,291)
Income attributable to non-controlling interests
(4)
—
(5,439)
(6,120)
—
(11,563)
Net income (loss) attributable to Starwood Property Trust, Inc.
137,753
355
(3,244)
70,987
(114,402)
91,449
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units
—
—
4,691
—
—
4,691
Non-controlling interests attributable to unrealized gains/losses
—
—
(155)
2,680
—
2,525
Non-cash equity compensation expense
1,783
1,054
55
950
6,086
9,928
Management incentive fee
—
—
—
—
51,163
51,163
Acquisition and investment pursuit costs
(97)
—
(89)
(108)
—
(294)
Depreciation and amortization
253
91
12,021
3,779
—
16,144
Interest income adjustment for securities
895
—
—
5,896
—
6,791
Extinguishment of debt, net
—
—
—
—
(247)
(247)
Other non-cash items
2
—
110
(2,020)
2
(1,906)
Reversal of GAAP unrealized (gains) / losses on:
Loans
10,243
—
—
(11,177)
—
(934)
Credit loss provision, net
9,397
11,301
—
—
—
20,698
Securities
(11,857)
—
—
(30,766)
—
(42,623)
Woodstar Fund investments
—
—
(6,425)
—
—
(6,425)
Derivatives
(16,690)
(429)
(7,927)
(1,514)
7,095
(19,465)
Foreign currency
346
(96)
(16)
1
—
235
(Earnings) loss from unconsolidated entities
(1,569)
(1,085)
—
(580)
—
(3,234)
Sales of properties
—
—
—
(12,487)
—
(12,487)
Recognition of Distributable realized gains /
(losses) on:
Loans
996
—
—
13,287
—
14,283
Realized credit loss
(7,050)
—
—
—
—
(7,050)
Securities
(6,138)
—
—
(3,274)
—
(9,412)
Woodstar Fund investments
—
—
7,182
—
—
7,182
Sale of interest in Woodstar Fund
—
—
196,410
—
—
196,410
Derivatives
3,718
217
(34)
503
—
4,404
Foreign currency
2,340
(91)
16
(1)
—
2,264
Earnings (loss) from unconsolidated entities
1,888
1,085
—
455
—
3,428
Sales of properties
—
—
—
7,508
—
7,508
Distributable Earnings (Loss)
$
126,213
$
12,402
$
202,595
$
44,119
$
(50,303)
$
335,026
Distributable Earnings (Loss) per Weighted Average Diluted Share
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended March 31, 2021, by business segment (amounts in thousands, except per share data):
Commercial and Residential Lending Segment
Infrastructure Lending Segment
Property Segment
Investing and Servicing Segment
Corporate
Total
Revenues
$
190,531
$
19,465
$
65,144
$
44,547
$
—
$
319,687
Costs and expenses
(56,414)
(12,956)
(59,498)
(32,457)
(71,647)
(232,972)
Other income (loss)
21,161
95
4,608
18,960
(6,843)
37,981
Income (loss) before income taxes
155,278
6,604
10,254
31,050
(78,490)
124,696
Income tax provision
(1,505)
(92)
—
(633)
—
(2,230)
Income attributable to non-controlling interests
(3)
—
(5,077)
(6,008)
—
(11,088)
Net income (loss) attributable to Starwood Property Trust, Inc.
153,770
6,512
5,177
24,409
(78,490)
111,378
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units
—
—
5,077
—
—
5,077
Non-controlling interests attributable to unrealized gains/losses
—
—
—
2,421
—
2,421
Non-cash equity compensation expense
1,781
300
31
881
7,317
10,310
Management incentive fee
—
—
—
—
13,123
13,123
Acquisition and investment pursuit costs
(164)
—
(89)
—
—
(253)
Depreciation and amortization
247
91
18,161
3,603
—
22,102
Interest income adjustment for securities
(1,300)
—
—
3,995
—
2,695
Extinguishment of debt, net
—
—
—
—
(246)
(246)
Income tax (provision) benefit associated with realized (gains) losses
(6,495)
—
—
405
—
(6,090)
Other non-cash items
3
—
(337)
207
415
288
Reversal of GAAP unrealized (gains) /
losses on:
Loans
10,714
—
—
(1,236)
—
9,478
Credit loss (reversal) provision, net
(529)
573
—
—
—
44
Securities
2,050
—
—
(7,170)
—
(5,120)
Derivatives
(27,171)
(745)
(6,446)
(9,719)
9,313
(34,768)
Foreign currency
11,594
49
(25)
63
—
11,681
(Earnings) loss from unconsolidated entities
(1,753)
254
—
(589)
—
(2,088)
Sales of properties
(17,693)
—
—
—
—
(17,693)
Recognition of Distributable realized gains / (losses) on:
Loans
14,553
—
—
4,672
—
19,225
Realized credit loss
(7,757)
—
—
—
—
(7,757)
Securities
(2,861)
—
—
(645)
—
(3,506)
Derivatives
1,950
—
(35)
1,595
—
3,510
Foreign currency
4,784
(10)
25
(63)
—
4,736
Earnings (loss) from unconsolidated entities
3,218
(254)
—
964
—
3,928
Sales of properties
8,298
—
—
—
—
8,298
Distributable Earnings (Loss)
$
147,239
$
6,770
$
21,539
$
23,793
$
(48,568)
$
150,773
Distributable Earnings (Loss) per Weighted Average Diluted Share
Three Months Ended March 31, 2022 Compared to the Three Months Ended December 31, 2021
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment’s Distributable Earnings increased by $104.6 million, from $126.2 million during the fourth quarter of 2021 to $230.8 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $227.7 million, costs and expenses were $79.4 million, other income was $77.4 million and income tax benefit was $5.1 million.
Revenues, consisting principally of interest income on loans, increased by $19.5 million in the first quarter of 2022, primarily due to an increase in interest income from loans of $12.7 million and investment securities of $6.5 million. The increase in interest income from loans reflects (i) a $9.5 million increase from commercial loans, reflecting higher average balances partially offset by the timing effect of certain loans being placed on nonaccrual and (ii) a $3.2 million increase from residential loans principally due to higher average balances reflecting the timing of purchases and securitizations. The increase in interest income from investment securities was primarily due to higher average commercial and RMBS investment balances as well as higher average yields on RMBS.
Costs and expenses increased by $0.4 million in the first quarter of 2022, primarily due to (i) a $7.0 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio and (ii) a $0.5 million increase in various other costs and expenses, both partially offset by (iii) the nonrecurrence of a $7.1 million commercial loan write-off in the fourth quarter of 2021.
Other income increased by $78.3 million in the first quarter of 2022, primarily due to an $84.7 million gain on sale of a distribution facility previously acquired in foreclosure, partially offset by a $7.8 million unfavorable change in residential loan sale and securitization gains (losses), net of related interest rate derivatives.
Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization activities which are housed in TRSs, decreased $7.2 million from a provision of $2.1 million to a benefit of $5.1 million primarily due to tax losses of those TRSs in the first quarter of 2022 compared to taxable income of those TRSs in the fourth quarter of 2021. The tax losses were primarily attributable to net unrealized losses on our residential loans during the first quarter of 2022.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s Distributable Earnings increased by $0.2 million, from $12.4 million during the fourth quarter of 2021 to $12.6 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $27.8 million, costs and expenses were $15.1 million and other loss was $0.1 million.
Revenues, consisting principally of interest income on loans, increased by $3.7 million in the first quarter of 2022, primarily due to an increase in interest income from loans of $3.5 million reflecting higher average balances and an increase in prepayment related income.
Costs and expenses increased by $2.1 million in the first quarter of 2022, primarily due to an increase in interest expense reflecting higher average borrowings outstanding.
Other income decreased by $1.4 million to a slight loss in the first quarter of 2022, primarily due to a $0.7 million decrease in earnings from an unconsolidated entity and a $0.5 million loss on extinguishment of debt in the first quarter of 2022.
Property Segment
Distributable Earnings by Portfolio (amounts in thousands)
The Property Segment’s Distributable Earnings decreased by $180.7 million, from $202.6 million during the fourth quarter of 2021 to $21.9 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $22.9 million, costs and expenses were $12.2 million, other income was $14.0 million and the deduction of income attributable to non-controlling interests in the Woodstar Fund was $2.8 million.
Revenues decreased by $15.0 million in the first quarter of 2022, primarily due to the conversion of the Woodstar Portfolios to the Woodstar Fund on November 5, 2021.
Costs and expenses decreased by $18.8 million in the first quarter of 2022, primarily due to the Woodstar Fund conversion referred to above.
Other income decreased by $182.6 million in the first quarter of 2022, primarily due to (i) the nonrecurrence of a $196.4 million Distributable Earnings gain relating to the 20.6% sale of third party investor interests in the Woodstar Fund on November 5, 2021 (excluding $5.1 million of related professional fees included in costs and expenses for both GAAP and Distributable Earnings), partially offset by (ii) an $8.5 million increase in Distributable Earnings of the Woodstar Fund reflecting a full quarter of earnings in the first quarter of 2022 compared to a partial period in the fourth quarter of 2021 subsequent to the November 5, 2021 Woodstar Fund conversion and (iii) the nonrecurrence of a $5.1 million loss on extinguishment of debt in the fourth quarter of 2021 related to the refinancing of certain Woodstar properties before their conversion to the Woodstar Fund.
Income attributable to non-controlling interests in the Woodstar Fund increased $1.9 million in the first quarter of 2022 due to the full quarter of earnings discussed above.
Investing and Servicing Segment
The Investing and Servicing Segment’s Distributable Earnings decreased by $14.3 million, from $44.1 million during the fourth quarter of 2021 to $29.8 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $56.3 million, costs and expenses were $32.2 million, other income was $13.2 million, income tax provision was $2.7 million and the deduction of income attributable to non-controlling interests was $4.8 million.
Revenues decreased by $5.6 million in the first quarter of 2022, primarily due to a $5.2 million decrease in interest income from CMBS. The treatment of CMBS interest income on a GAAP basis is complicated by our application of the ASC 810 consolidation rules. In an attempt to treat these securities similar to the trust’s other investment securities, we compute distributable interest income pursuant to an effective yield methodology. In doing so, we segregate the portfolio into various categories based on the components of the bonds’ cash flows and the volatility related to each of these components. We then accrete interest income on an effective yield basis using the components of cash flows that are reliably estimable. Other minor adjustments are made to reflect management’s expectations for other components of the projected cash flow stream.
Costs and expenses decreased by $0.9 million in the first quarter of 2022.
Other income includes profit realized upon securitization of loans by our conduit business, gains on sales of CMBS and operating properties, gains and losses on derivatives that were either effectively terminated or novated, and earnings from unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic servicing rights intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair value due to the attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk and credit risk on our conduit loans and CMBS investments. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair value, with all changes in fair value (realized or unrealized) recognized in earnings. The adjustments to Distributable Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Other income decreased by $5.8 million in the first quarter of 2022 primarily due to decreased net gains on sales of operating properties.
Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan securitization businesses which are housed in TRSs, increased $2.5 million due to higher taxable income of those TRSs in the first quarter of 2022.
Income attributable to non-controlling interests increased $1.3 million, primarily due to non-controlling interests related to the sale of an operating property in the first quarter of 2022.
Corporate
Corporate loss increased by $4.8 million, from $50.3 million during the fourth quarter of 2021 to $55.1 million in the first quarter of 2022, primarily due to a $4.4 million increase in interest expense on higher average outstanding unsecured senior note balances.
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31, 2021
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment’s Distributable Earnings increased by $83.6 million, from $147.2 million during the first quarter of 2021 to $230.8 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $227.7 million, costs and expenses were $79.4 million, other income was $77.4 million and income tax benefit was $5.1 million.
Revenues, consisting principally of interest income on loans, increased by $38.5 million in the first quarter of 2022, primarily due to increases in interest income from loans of $31.9 million and investment securities of $6.2 million. The increase in interest income from loans reflects (i) a $17.2 million increase from commercial loans, reflecting higher average balances partially offset by lower prepayment related income and the timing effect of certain loans being placed on nonaccrual and (ii) a $14.7 million increase from residential loans principally due to higher average balances reflecting the timing of purchases and securitizations. The increase in interest income from investment securities was primarily due to higher commercial and RMBS average investment balances as well as higher average yields on RMBS.
Costs and expenses increased by $16.6 million in the first quarter of 2022, primarily due to (i) a $24.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by (ii) the nonrecurrence of a $7.8 million write-off of an unsecured commercial loan in the first quarter of 2021. The increase in interest expense was primarily due to higher average borrowings outstanding.
Other income increased by $48.6 million in the first quarter of 2022, primarily due to (i) a $76.4 million increased gain on sale of foreclosed properties, partially offset by (ii) a $19.8 million increased loss on residential loan sales and securitizations, net of related interest rate derivatives and (iii) a $4.4 million unfavorable change in Distributable Earnings (Loss) from an unconsolidated residential mortgage originator.
Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization activities which are housed in TRSs, decreased $13.1 million from a provision of $8.0 million in the first quarter of 2021 to a benefit of $5.1 million in the first quarter of 2022 due to tax losses of those TRSs in the first quarter of 2022 compared to taxable income of those TRSs in the first quarter of 2021. The tax losses were primarily attributable to net unrealized losses on our residential loans during the first quarter of 2022.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s Distributable Earnings increased by $5.8 million, from $6.8 million in the first quarter of 2021 to $12.6 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $27.8 million, costs and expenses were $15.1 million and other loss was $0.1 million.
Revenues, consisting principally of interest income on loans, increased by $8.3 million in the first quarter of 2022, primarily due to an increase in interest income from loans of $8.2 million principally due to higher average balances outstanding and an increase in prepayment related income.
Costs and expenses increased by $3.1 million in the first quarter of 2022, primarily due to an increase in interest expense reflecting higher average borrowings outstanding.
Other loss decreased by $0.5 million in the first quarter of 2022, primarily due to a favorable change in earnings (loss) from an unconsolidated entity.
Distributable Earnings by Portfolio (amounts in thousands)
For the Three Months Ended March 31,
2022
2021
Change
Master Lease Portfolio
$
4,342
$
4,312
$
30
Medical Office Portfolio
5,656
5,513
143
Woodstar I Portfolio
—
6,338
(6,338)
Woodstar II Portfolio
—
6,100
(6,100)
Woodstar Fund, net of non-controlling interests
12,719
—
12,719
Other/Corporate
(808)
(724)
(84)
Distributable Earnings
$
21,909
$
21,539
$
370
The Property Segment’s Distributable Earnings increased by $0.4 million, from $21.5 million in the first quarter of 2021 to $21.9 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $22.9 million, costs and expenses were $12.2 million, other income was $14.0 million and the deduction of income attributable to non-controlling interests in the Woodstar Fund was $2.8 million.
Revenues decreased by $41.9 million in the first quarter of 2022, primarily due to the conversion of the Woodstar Portfolios to the Woodstar Fund on November 5, 2021.
Costs and expenses decreased by $29.3 million in the first quarter of 2022, primarily due to the Woodstar Fund conversion referred to above.
Other income increased by $15.8 million in the first quarter of 2022 primarily due to $15.6 million of Distributable Earnings (before non-controlling interests of $2.8 million) from the Woodstar Fund in the first quarter of 2022.
Investing and Servicing Segment
The Investing and Servicing Segment’s Distributable Earnings increased by $6.0 million from $23.8 million during the first quarter of 2021 to $29.8 million in the first quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were $56.3 million, costs and expenses were $32.2 million, other income was $13.2 million, income tax provision was $2.7 million and the deduction of income attributable to non-controlling interests was $4.8 million.
Revenues increased by $7.5 million in the first quarter of 2022, primarily due to (i) a $4.6 million increase in other fee income principally related to the origination of certain loans contributed into CMBS transactions and (ii) a $3.0 million increase in interest income from conduit loans reflecting higher average balances outstanding.
Costs and expenses increased by $4.1 million in the first quarter of 2022, primarily due to an increase in general and administrative expenses reflecting increased incentive compensation principally due to higher securitization net income.
Other income increased by $6.3 million in the first quarter of 2022, primarily due to (i) a $22.3 million increase in realized gains on derivatives, principally related to conduit loans, partially offset by a $15.2 million unfavorable change in realized gains (losses) on conduit loans.
Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan securitization businesses which are housed in TRSs, increased $2.5 million due to higher taxable income of those TRSs during the first quarter of 2022.
Income attributable to non-controlling interests increased $1.2 million primarily due to non-controlling interests related to the sale of an operating property in the first quarter of 2022.
Corporate
Corporate loss increased by $6.5 million, from $48.6 million during the first quarter of 2021 to $55.1 million in the first quarter of 2022, primarily due to (i) a $5.1 million increase in interest expense on higher average outstanding term loan and
unsecured senior note balances and (ii) a $2.4 million increase in base management fees, partially offset by (iii) a $1.1 million increase in realized gains on fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet our cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make new investments where appropriate, pay dividends to our stockholders, and other general business needs. We closely monitor our liquidity position and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our strategy for managing liquidity and capital resources has not changed since December 31, 2021. Refer to our Form 10-K for a description of these strategies.
Sources of Liquidity
Our primary sources of liquidity are as follows:
Cash Flows for the Three Months Ended March 31, 2022 (amounts in thousands)
GAAP
VIE Adjustments
Excluding Investing and Servicing VIEs
Net cash provided by operating activities
$
154,374
$
4
$
154,378
Cash Flows from Investing Activities:
Origination, purchase and funding of loans held-for-investment
(1,557,821)
—
(1,557,821)
Proceeds from principal collections and sale of loans
798,969
—
798,969
Purchase and funding of investment securities
(18,139)
(84,357)
(102,496)
Proceeds from sales and collections of investment securities
7,784
22,014
29,798
Proceeds from sales of real estate
147,334
—
147,334
Purchases and additions to properties and other assets
(6,604)
—
(6,604)
Net cash flows from other investments and assets
73,715
—
73,715
Net cash used in investing activities
(554,762)
(62,343)
(617,105)
Cash Flows from Financing Activities:
Proceeds from borrowings
5,843,167
—
5,843,167
Principal repayments on and repurchases of borrowings
(5,153,638)
(101)
(5,153,739)
Payment of deferred financing costs
(21,998)
—
(21,998)
Proceeds from common stock issuances, net of offering costs
162
—
162
Payment of dividends
(146,709)
—
(146,709)
Contributions from non-controlling interests
4,690
—
4,690
Distributions to non-controlling interests
(10,718)
—
(10,718)
Repayment of debt of consolidated VIEs
(84,460)
84,460
—
Distributions of cash from consolidated VIEs
22,014
(22,014)
—
Net cash provided by financing activities
452,510
62,345
514,855
Net increase in cash, cash equivalents and restricted cash
52,122
6
52,128
Cash, cash equivalents and restricted cash, beginning of period
321,914
(590)
321,324
Effect of exchange rate changes on cash
(262)
—
(262)
Cash, cash equivalents and restricted cash, end of period
$
373,774
$
(584)
$
373,190
The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of the securitization VIEs under ASC 810. These adjustments principally relate to (i) the purchase of CMBS, RMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP basis and (ii) sales, principal collections and redemptions of CMBS and RMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP basis. There is no significant net impact to overall cash resulting from these consolidations. Refer to Note 2 to the Condensed Consolidated Financial Statements for further discussion.
Cash and cash equivalents increased by $52.1 million during the three months ended March 31, 2022, reflecting net cash provided by financing activities of $514.9 million and net cash provided by operating activities of $154.4 million, partially offset by net cash used in investing activities of $617.1 million.
Net cash provided by operating activities of $154.4 million during the three months ended March 31, 2022 related primarily to cash interest income of $176.4 million from our loans and $50.2 million from our investment securities, and sales and principal collections, net of originations and purchases, of loans held-for-sale of $72.1 million. Net rental income provided cash of $22.7 million and servicing fees provided cash of $12.3 million. Offsetting these cash outflows was cash interest expense of $102.3 million, general and administrative expenses of $27.0 million, management fees of $46.0 million and a net change in operating assets and liabilities of $15.3 million.
Net cash used in investing activities of $617.1 million for the three months ended March 31, 2022 related primarily to the origination and acquisition of loans held-for-investment of $1.6 billion and the purchase and funding of investment securities of $102.5 million, partially offset by proceeds received from principal collections and sales of loans of $799.0 million and investment securities of $29.8 million and sales of operating properties for $147.3 million.
Net cash provided by financing activities of $514.9 million for the three months ended March 31, 2022 related primarily to borrowings on our debt, net of repayments and deferred loan costs, of $667.4 million, partially offset by dividend distributions of $146.7 million.
The following is a review of our investment portfolio by segment.
Commercial and Residential Lending Segment
The following table sets forth the amount of each category of investments we owned across various property types within our Commercial and Residential Lending Segment as of March 31, 2022 and December 31, 2021 (dollars in thousands):
Face Amount
Carrying Value
Asset Specific Financing
Net Investment
Unlevered Return on Asset (6)
March 31, 2022
First mortgages (1)
$
13,674,735
$
13,586,767
$
9,362,989
$
4,223,778
5.1
%
Subordinated mortgages (2)
72,399
70,934
—
70,934
11.9
%
Mezzanine loans (1)
422,752
424,835
—
424,835
11.6
%
Residential loans, fair value option
57,792
55,621
30,754
24,867
6.0
%
(5)
Other loans
18,599
17,138
—
17,138
13.3
%
Loans held-for-sale, fair value option, residential
2,331,997
2,299,153
1,584,841
714,312
4.3
%
(5)
RMBS, available-for-sale
215,224
134,406
90,579
43,827
12.4
%
RMBS, fair value option
179,896
311,292
(3)
47,941
263,351
12.7
%
CMBS, fair value option
102,900
98,242
(3)
49,798
48,444
5.2
%
HTM debt securities (4)
650,209
652,508
113,143
539,365
6.7
%
Credit loss allowance
—
(48,379)
—
(48,379)
Equity security
12,004
11,619
—
11,619
Investments in unconsolidated entities
N/A
43,349
—
43,349
Properties, net
N/A
104,901
—
104,901
$
17,738,507
$
17,762,386
$
11,280,045
$
6,482,341
December 31, 2021
First mortgages (1)
$
13,057,621
$
12,981,196
$
9,116,486
$
3,864,710
5.2
%
Subordinated mortgages (2)
72,371
70,771
—
70,771
11.8
%
Mezzanine loans (1)
415,155
417,504
—
417,504
10.9
%
Residential loans, fair value option
60,133
59,225
36,934
22,291
6.0
%
(5)
Other loans
19,029
17,424
—
17,424
13.3
%
Loans held-for-sale, fair value option, residential
2,525,910
2,590,005
1,808,372
781,633
4.2
%
(5)
RMBS, available-for-sale
221,806
143,980
97,354
46,626
11.8
%
RMBS, fair value option
127,437
250,424
(3)
37,213
213,211
12.6
%
CMBS, fair value option
102,900
98,211
(3)
49,798
48,413
5.2
%
HTM debt securities (4)
655,557
656,915
113,143
543,772
6.7
%
Credit loss allowance
—
(52,302)
—
(52,302)
Equity security
12,366
11,624
—
11,624
Investments in unconsolidated entities
N/A
44,938
—
44,938
Properties, net
N/A
124,503
49,483
75,020
$
17,270,285
$
17,414,418
$
11,308,783
$
6,105,635
__________________________________________
(1)First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of $1.3 billion and $1.4 billion being classified as first mortgages as of March 31, 2022 and December 31, 2021, respectively.
(2)Subordinated mortgages include B-Notes and junior participation in first mortgages where we do not own the senior A-Note or senior participation. If we own both the A-Note and B-Note, we categorize the loan as a first mortgage loan.
(3)Eliminated in consolidation against VIE liabilities pursuant to ASC 810.
(4)CMBS held-to-maturity (“HTM”) and mandatorily redeemable preferred equity interests in commercial real estate entities.
(5)Represents the weighted average coupon of residential mortgage loans.
(6)Excludes loans for which interest income is not recognized.
As of March 31, 2022 and December 31, 2021, our Commercial and Residential Lending Segment’s investment portfolio, excluding residential loans, RMBS, properties and other investments, had the following characteristics based on carrying values:
The following table sets forth the amount of each category of investments we owned within our Infrastructure Lending Segment as of March 31, 2022 and December 31, 2021 (dollars in thousands):
Face Amount
Carrying Value
Asset Specific Financing
Net Investment
Unlevered Return on Asset
March 31, 2022
First priority infrastructure loans and HTM securities
$
2,243,207
$
2,208,582
$
1,736,500
$
472,082
5.3
%
Credit loss allowance
—
(23,266)
—
(23,266)
Investments in unconsolidated entities
—
27,061
—
27,061
$
2,243,207
$
2,212,377
$
1,736,500
$
475,877
December 31, 2021
First priority infrastructure loans and HTM securities
$
2,116,836
$
2,082,927
$
1,630,866
$
452,061
5.1
%
Credit loss allowance
—
(23,578)
—
(23,578)
Investments in unconsolidated entities
—
26,255
—
26,255
$
2,116,836
$
2,085,604
$
1,630,866
$
454,738
As of March 31, 2022 and December 31, 2021, our Infrastructure Lending Segment’s investment portfolio had the following characteristics based on carrying values:
The following table sets forth the amount of each category of investments held within our Property Segment as of March 31, 2022 and December 31, 2021 (amounts in thousands):
March 31, 2022
December 31, 2021
Properties, net
$
880,392
$
887,553
Lease intangibles, net
31,908
33,151
Woodstar Fund
1,264,160
1,040,309
$
2,176,460
$
1,961,013
The following table sets forth our net investment and other information regarding the Property Segment’s properties and lease intangibles as of March 31, 2022 (dollars in thousands):
Carrying Value
Asset Specific Financing
Net Investment
Occupancy Rate
Weighted Average Remaining Lease Term
Office—Medical Office Portfolio
$
762,587
$
594,852
$
167,735
91.6
%
5.8 years
Retail—Master Lease Portfolio
343,790
193,125
150,665
100.0
%
20.1 years
Subtotal—undepreciated carrying value
1,106,377
787,977
318,400
Accumulated depreciation and amortization
(194,077)
—
(194,077)
Net carrying value
$
912,300
$
787,977
$
124,323
As of March 31, 2022 and December 31, 2021, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:
The following table sets forth the amount of each category of investments we owned within our Investing and Servicing Segment as of March 31, 2022 and December 31, 2021 (amounts in thousands):
Face Amount
Carrying Value
Asset Specific Financing
Net Investment
March 31, 2022
CMBS, fair value option
$
2,652,603
$
1,155,469
(1)
$
376,555
(2)
$
778,914
Intangible assets - servicing rights
N/A
58,682
(3)
—
58,682
Lease intangibles, net
N/A
10,221
—
10,221
Loans held-for-sale, fair value option, commercial
392,505
385,359
259,299
126,060
Loans held-for-investment
9,823
9,823
—
9,823
Investments in unconsolidated entities
N/A
33,878
(4)
—
33,878
Properties, net
N/A
137,064
138,606
(1,542)
$
3,054,931
$
1,790,496
$
774,460
$
1,016,036
December 31, 2021
CMBS, fair value option
$
2,694,413
$
1,165,395
(1)
$
380,004
(2)
$
785,391
Intangible assets - servicing rights
N/A
58,899
(3)
—
58,899
Lease intangibles, net
N/A
11,342
—
11,342
Loans held-for-sale, fair value option, commercial
289,761
286,795
173,430
113,365
Loans held-for-investment
9,903
9,903
—
9,903
Investments in unconsolidated entities
N/A
34,160
(4)
—
34,160
Properties, net
N/A
154,331
160,803
(6,472)
$
2,994,077
$
1,720,825
$
714,237
$
1,006,588
______________________________________________
(1)Includes $1.13 billion and $1.14 billion of CMBS eliminated in consolidation against VIE liabilities pursuant to ASC 810 as of March 31, 2022 and December 31, 2021. Also includes $190.6 million and $182.6 million of non-controlling interests in the consolidated entities which hold certain of these CMBS as of March 31, 2022 and December 31, 2021, respectively.
(2)Includes $38.8 million and $35.8 million of non-controlling interests in the consolidated entities which hold certain debt balances as of March 31, 2022 and December 31, 2021, respectively.
(3)Includes $40.8 million and $42.1 million of servicing rights intangibles eliminated in consolidation against VIE assets pursuant to ASC 810 as of March 31, 2022 and December 31, 2021, respectively.
(4)Includes $15.0 million and $15.3 million of investments in unconsolidated entities eliminated in consolidation against VIE assets pursuant to ASC 810 as of March 31, 2022 and December 31, 2021, respectively.
Our REIS Equity Portfolio, as described in Note 6 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $132.5 million and $150.9 million as of March 31, 2022 and December 31, 2021, respectively:
Refer to Note 10 of our Condensed Consolidated Financial Statements for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2021.
Secured Borrowings
The following table is a summary of our secured borrowings as of March 31, 2022 (dollars in thousands):
Current Maturity
Extended Maturity (a)
Weighted Average Pricing
Pledged Asset Carrying Value
Maximum Facility Size
Outstanding Balance
Approved but Undrawn Capacity (b)
Unallocated Financing Amount (c)
Repurchase Agreements:
Commercial Loans
Aug 2022 to Jul 2026
(d)
Jun 2025 to Dec 2030
(d)
Index + 1.98%
(e)
$
9,013,669
$
11,572,553
(f)
$
6,121,160
$
549,422
$
4,901,971
Residential Loans
Feb 2023 to Dec 2023
N/A
Index + 1.93%
1,965,289
2,850,000
1,594,785
15,089
1,240,126
Infrastructure Loans
Sep 2024
Sep 2026
LIBOR + 2.00%
310,044
650,000
256,044
—
393,956
Conduit Loans
Feb 2023 to Jun 2024
Feb 2024 to Jun 2025
Index + 2.04%
333,827
650,000
260,177
—
389,823
CMBS/RMBS
Dec 2022 to May 2031
(g)
Mar 2023 to Nov 2031
(g)
(h)
1,213,883
827,204
688,316
(i)
—
138,888
Total Repurchase Agreements
12,836,712
16,549,757
8,920,482
564,511
7,064,764
Other Secured Financing:
Borrowing Base Facility
Nov 2024
Oct 2026
SOFR + 2.11%
193,173
750,000
(j)
100,742
43,890
605,368
Commercial Financing Facilities
Dec 2023 to Jan 2025
Jan 2027 to Dec 2030
Index + 1.66%
255,131
241,981
207,051
—
34,930
Residential Financing Facility
Mar 2024
Mar 2027
2.45%
386,635
500,000
22,948
294,067
182,985
Infrastructure Financing Facilities
Jul 2022 to Oct 2022
Oct 2024 to Jul 2027
Index + 2.03%
820,121
1,250,000
653,312
—
596,688
Property Mortgages - Fixed rate
Nov 2024 to Sep 2029
(k)
N/A
4.35%
387,022
272,321
272,321
—
—
Property Mortgages - Variable rate
Nov 2022 to Dec 2025
N/A
(l)
655,967
654,900
640,541
—
14,359
Term Loan and Revolver
(m)
N/A
(m)
N/A
(m)
936,756
786,756
150,000
—
STWD 2022-FL3 CLO
Nov 2038
N/A
SOFR + 1.64%
1,011,426
842,500
842,500
—
—
STWD 2021-HTS SASB
Apr 2034
N/A
LIBOR + 2.22%
230,609
210,091
210,091
—
—
STWD 2021-FL2 CLO
Apr 2038
N/A
LIBOR + 1.50%
1,280,262
1,077,375
1,077,375
—
—
STWD 2019-FL1 CLO
Jul 2038
N/A
SOFR + 1.36%
1,031,438
865,225
865,225
—
—
STWD 2021-SIF2 CLO
Jan 2033
N/A
SOFR + 1.89%
504,479
410,000
410,000
—
—
STWD 2021-SIF1 CLO
Apr 2032
N/A
LIBOR + 1.80%
506,443
410,000
410,000
—
—
Total Other Secured Financing
7,262,706
8,421,149
6,498,862
487,957
1,434,330
$
20,099,418
$
24,970,906
$
15,419,344
$
1,052,468
$
8,499,094
Unamortized net discount
(3,989)
Unamortized deferred financing costs
(85,889)
$
15,329,466
___________________________________________
(a)Subject to certain conditions as defined in the respective facility agreement.
(b)Approved but undrawn capacity represents the total draw amount that has been approved by the lenders related to those assets that have been pledged as collateral, less the drawn amount.
(c)Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the lenders.
(d)For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.
(e)Certain facilities with an outstanding balance of $2.1 billion as of March 31, 2022 are indexed to GBP LIBOR, EURIBOR, BBSY and SONIA. The remainder are indexed to USD LIBOR and SOFR.
(f)Certain facilities with an aggregate initial maximum facility size of $10.7 billion may be increased to $11.6 billion, subject to certain conditions. The $11.6 billion amount includes such upsizes.
(g)Certain facilities with an outstanding balance of $284.1 million as of March 31, 2022 carry a rolling 11-month or 12-month term which may reset monthly or quarterly with the lender's consent. These facilities carry no maximum facility size.
(h)A facility with an outstanding balance of $240.5 million as of March 31, 2022 has a weighted average fixed annual interest rate of 3.20%. All other facilities are variable rate with a weighted average rate of Index + 1.89%.
(i)Includes: (i) $240.5 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $38.8 million outstanding on one of our repurchase facilities that represents the 49% pro rata share owed by a non-controlling partner in a consolidated joint venture (see Note 15 to the Condensed Consolidated Financial Statements).
(j)The maximum facility size as of March 31, 2022 of $650.0 million is scheduled to decline to $450.0 million as of December 31, 2022 and may be increased to $750.0 million, subject to certain conditions.
(k)The weighted average maturity is 5.3 years as of March 31, 2022.
(l)Includes a $600.0 million first mortgage and mezzanine loan secured by our Medical Office Portfolio. This debt has a weighted average interest rate of LIBOR + 2.07% that we swapped to a fixed rate of 3.34%. The remainder have a weighted average rate of Index + 2.35%.
(m)Consists of: (i) a $786.8 million term loan facility that matures in July 2026, of which $390.0 million has an annual interest rate of LIBOR + 2.50% and $396.8 million has an annual interest rate of LIBOR + 3.25%, subject to a 0.75% LIBOR floor, and (ii) a $150.0 million revolving credit facility that matures in April 2026 with an annual interest rate of SOFR + 2.50%. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $4.8 billion as of March 31, 2022.
The above table no longer reflects property mortgages of the Woodstar Portfolios which, as discussed in Notes 2 and 7 to the Condensed Consolidated Financial Statements, are now reflected within “Investments of consolidated affordable housing fund” on our condensed consolidated balance sheets.
Refer to Note 10 to the Condensed Consolidated Financial Statements for further disclosure regarding the terms of our secured financing arrangements.
Variance between Average and Quarter-End Credit Facility Borrowings Outstanding
The following table compares the average amount outstanding under our secured financing agreements during each quarter and the amount outstanding as of the end of each quarter, together with an explanation of significant variances (amounts in thousands):
Quarter Ended
Quarter-End Balance
Weighted-Average Balance During Quarter
Variance
Explanations for Significant Variances
December 31, 2021
15,288,261
14,428,687
859,574
(a)
March 31, 2022
15,419,344
15,645,668
(226,324)
(b)
_____________________________________________
(a)Variance primarily due to (i) late quarter draws on commercial, residential and infrastructure loan facilities given the majority of the quarter’s loan closings were back-ended to the last half of the quarter; offset by (ii) the accounting for the Woodstar Fund, which requires property level debt to be presented net within investments of consolidated affordable housing fund.
(b)Variance primarily due to sales and securitizations that occurred late in the quarter.
Borrowings under Unsecured Senior Notes
During the three months ended March 31, 2022 and 2021, the weighted average effective borrowing rate on our unsecured senior notes was 4.8% and 5.4%, respectively. The effective borrowing rate includes the effects of underwriter purchase discount.
Refer to Note 11 to the Condensed Consolidated Financial Statements for further disclosure regarding the terms of our unsecured senior notes.
Scheduled Principal Repayments on Investments and Overhang on Financing Facilities
The following scheduled and/or projected principal repayments on our investments were based on amounts outstanding and extended contractual maturities of those investments as of March 31, 2022. The projected and/or required repayments of financing were based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):
Scheduled Principal Repayments on Loans and HTM Securities
Scheduled/Projected Principal Repayments on RMBS and CMBS
Projected/Required Repayments of Financing
Scheduled Principal Inflows Net of Financing Outflows
(1)Shortfall primarily relates to: (i) $799.1 million of repayments under a Residential Loans repurchase facility that carries a one-year term which we can extend every three months with the lender’s consent, and (ii) $270.7 million of repayments under a securities facility which carries a rolling 12-month term that we have historically extended, and intend to continue to extend with lender’s consent.
In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.
Issuances of Equity Securities
We may raise funds through capital market transactions by issuing capital stock. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have authorized 100,000,000 shares of preferred stock and 500,000,000 shares of common stock. At March 31, 2022, we had 100,000,000 shares of preferred stock available for issuance and 193,087,695 shares of common stock available for issuance.
Other Potential Sources of Financing
In the future, we may also use other sources of financing to fund the acquisition of our target assets and maturities of our unsecured senior notes, including other secured as well as unsecured forms of borrowing and sale of senior loan interests and other assets.
Leverage Policies
Our strategies with regards to use of leverage have not changed significantly since December 31, 2021. Refer to our Form 10-K for a description of our strategies regarding use of leverage.
Cash Requirements
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We generally intend to distribute substantially all of our taxable income (which does not necessarily equal our GAAP net income) to our stockholders each year, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Refer to our Form 10-K for a detailed dividend history.
(a)Represents the contractual maturity of the respective credit facility, inclusive of available extension options. If investments that have been pledged as collateral repay earlier than the contractual maturity of the debt, the related portion of the debt would likewise require earlier repayment. Refer to Note 10 to the Consolidated Financial Statements for the expected maturities by year.
(b)Represents the fully extended maturity of the underlying collateral.
(c)Excludes $297.2 million of loan funding commitments in which management projects the Company will not be obligated to fund in the future due to repayments made by the borrower earlier than, or in excess of, expectations.
(e)Represents contractual commitments of $135.1 million under revolvers and letters of credit, $12.1 million under delayed draw term loans and $20.6 million of outstanding infrastructure loan purchase commitments.
The table above does not include interest payable, amounts due under our management agreement, amounts due under our derivative agreements or amounts due under guarantees as those contracts do not have fixed and determinable payments.
Our secured financings, CLOs and SASB consist primarily of matched-term funding for our loans and investment securities and long-term mortgages on our owned properties. Repayments of such facilities are generally made from proceeds from maturities, prepayments or sales of such investments and operating cash flows from owned properties. In the normal course of business, we are in discussions with our lenders to extend, amend or replace any financing facilities which contain near term expirations.
Our unsecured senior notes are expected to be repaid from a combination of available cash on hand, approved but undrawn capacity under our secured financing agreements, and/or equity issuances or other potential sources of financing, as discussed above, including issuances of new unsecured senior notes.
Our future loan commitments are expected to be primarily matched-term funded under secured financing agreements with any difference funded from available cash on hand or other potential sources of financing discussed above.
Critical Accounting Estimates
Refer to the section of our Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for a full discussion of our critical accounting estimates. Our critical accounting estimates have not materially changed since December 31, 2021.
Refer to Note 2 to the Condensed Consolidated Financial Statements for a discussion of recent accounting developments and the expected impact to the Company.
Item 3.Quantitative and QualitativeDisclosures About Market Risk
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake. Our strategies for managing risk and our exposure to such risks, as described in Item 7A of our Form 10-K, have not changed materially since December 31, 2021 except as described below.
Credit Risk
Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
We seek to further manage credit risk associated with our Investing and Servicing Segment loans held-for-sale through the purchase of credit instruments. The following table presents our credit instruments as of March 31, 2022 and December 31, 2021 (dollars in thousands):
Face Value of Loans Held-for-Sale
Aggregate Notional Value of Credit Instruments
Number of Credit Instruments
March 31, 2022
$
72,425
$
84,000
4
December 31, 2021
$
289,761
$
49,000
3
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match the interest rate characteristics of our investments with the interest rate characteristics of any related financing obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. In instances where the interest rate characteristics of an investment and the related financing obligation are not matched, we mitigate such interest rate risk through the utilization of interest rate derivatives of the same duration. The following table presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related interest rate derivatives as of March 31, 2022 and December 31, 2021 (dollars in thousands):
The following table summarizes the estimated annual change in net investment income for our variable rate investments and our variable rate debt assuming increases or decreases in LIBOR or other applicable index rates and adjusted for the effects of our interest rate hedging activities (amounts in thousands):
Income (Expense) Subject to Interest Rate Sensitivity
Variable rate investments and indebtedness (1)
0.5% Increase
1.0% Increase
1.50% Increase
2.0% Increase
Investment income from variable rate investments
$
16,349,800
$
60,598
$
129,999
$
205,407
$
285,571
Interest expense from variable rate debt, net of interest rate derivatives
(12,018,188)
(61,186)
(124,618)
(188,160)
(251,597)
Net investment income from variable rate instruments
(1)Includes the notional value of interest rate derivatives.
LIBOR Transition Risk
The United Kingdom’s Financial Conduct Authority (the authority that regulates LIBOR) stopped compelling banks to submit rates for the calculation of LIBOR and the LIBOR administrator ceased publication of non-U.S. dollar LIBOR after December 31, 2021. However, for U.S. dollar LIBOR, the relevant date has been deferred to June 30, 2023. Regulators emphasized that, despite any continued publication of U.S. dollar LIBOR through June 30, 2023, no new contracts using U.S. dollar LIBOR should be entered into after December 31, 2021. As indicated in the Interest Rate Risk section above, a substantial portion of our loans, investment securities, borrowings and interest rate derivatives are indexed to LIBOR or similar reference rates. Our U.S. dollar LIBOR-based loan agreements and borrowing arrangements generally specify alternative reference rates such as the prime rate, federal funds rate or secured overnight financing rate (“SOFR”). Our foreign denominated loan agreements and borrowing arrangements now generally specify the sterling overnight index average (“SONIA”) instead of GBP LIBOR and the bank bill swap rate (“BBSW” or “BBSY”) instead of AUD LIBOR.
As of March 31, 2022, daily compounded SONIA is utilized as the floating benchmark rate on $2.2 billion of our loans and $1.7 billion of our debt outstanding, while SOFR is utilized as the floating benchmark rate on $2.1 billion of our loans and $3.8 billion of our debt outstanding.
At this time, it is not possible to predict how markets will respond to SOFR, SONIA, or other alternative reference rates as the transition away from USD LIBOR and GBP LIBOR proceeds. The resulting changes to benchmark interest rates could increase our financing costs and/or result in mismatches between the interest rates of our investments and the corresponding financings.
Our loans and investments that are denominated in a foreign currency are also subject to risks related to fluctuations in exchange rates. We generally mitigate this exposure by matching the currency of our foreign currency assets to the currency of the borrowings that finance those assets. As a result, we substantially reduce our exposure to changes in portfolio value related to changes in foreign exchange rates.
We intend to hedge our net currency exposures in a prudent manner. However, our currency hedging strategies may not eliminate all of our currency risk due to, among other things, uncertainties in the timing and/or amount of payments received on the related investments, and/or unequal, inaccurate, or unavailable hedges to perfectly offset changes in future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges for the benefit of the hedge counterparty, which could adversely affect our liquidity.
Consistent with our strategy of hedging foreign currency exposure on certain investments, we typically enter into a series of forwards to fix the U.S. dollar amount of foreign currency denominated cash flows (interest income and principal payments) we expect to receive from our foreign currency denominated investments. Accordingly, the notional values and expiration dates of our foreign currency hedges approximate the amounts and timing of future payments we expect to receive on the related investments.
The following table represents our assets and liabilities that are denominated in foreign currencies as well as our expected future net interest receipts (amounts in thousands):
March 31, 2022
GBP
EUR
AUD
Foreign currency assets
£
1,751,623
€
678,571
A$
406,807
Foreign currency liabilities
(1,281,997)
(250,869)
(279,088)
Foreign currency contracts - notional
(548,666)
(500,544)
(131,116)
Expected future net interest cash flows
79,040
72,842
3,397
Net exposure to exchange rate fluctuations
£
—
€
—
A$
—
Net exposure to exchange rate fluctuations in USD (1)
(1) Represents the U.S. dollar equivalent using the GBP closing rate of 1.3133, EUR closing rate of 1.1069 and AUD closing rate of 0.7480 as of March 31, 2022.
Substantially all of our net asset exposure to the GBP, EUR, and AUD has been hedged with foreign currency forward contracts as of March 31, 2022, as indicated in the table above. Refer to Note 13 of the Condensed Consolidated Financial Statements for further detail regarding our foreign currency derivatives and their contractual maturities.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting. No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Currently, no material legal proceedings are pending or, to our knowledge, threatened or contemplated against us, that could have a material adverse effect on our business, financial position or results of operations.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in our Form 10-K.
Item 2. Unregistered Sales of EquitySecurities and Use of Proceeds.
There were no unregistered sales of securities during the three months ended March 31, 2022.
Issuer Purchases of Equity Securities
There were no purchases of common stock during the three months ended March 31, 2022.
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STARWOOD PROPERTY TRUST, INC.
Date: May 4, 2022
By:
/s/ BARRY S. STERNLICHT
Barry S. Sternlicht
Chief Executive Officer
Principal Executive Officer
Date: May 4, 2022
By:
/s/ RINA PANIRY
Rina Paniry
Chief Financial Officer, Treasurer, Chief Accounting Officer and Principal Financial Officer
