10-Q 1 stwd-20160331x10q.htm 10-Q stwd_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34436

 


 

Starwood Property Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Maryland

 

27-0247747

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

591 West Putnam Avenue

 

 

Greenwich, Connecticut

 

06830

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(203) 422-7700

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer 

 

Accelerated filer 

 

 

 

Non-accelerated filer 

 

Smaller reporting company 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

 

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of May 4, 2016 was 237,661,803.

 

 

 

 

 

 


 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.

 

These forward-looking statements are based largely on our current beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors that may cause actual results to vary from our forward-looking statements include, but are not limited to:

 

·

factors described in our Annual Report on Form 10-K for the year ended December 31, 2015 and this Quarterly Report on Form 10-Q, including those set forth under the captions “Risk Factors” and “Business”;

 

·

defaults by borrowers in paying debt service on outstanding indebtedness;

 

·

impairment in the value of real estate property securing our loans or in which we invest;

 

·

availability of mortgage origination and acquisition opportunities acceptable to us;

 

·

potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;

 

·

national and local economic and business conditions;

 

·

general and local commercial and residential real estate property conditions;

 

·

changes in federal government policies;

 

·

changes in federal, state and local governmental laws and regulations;

 

·

increased competition from entities engaged in mortgage lending and securities investing activities;

 

·

changes in interest rates; and

 

·

the availability of, and costs associated with, sources of liquidity.

 

In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur. Except to the extent required by applicable law or regulation, we undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise.

2


 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

Part I 

Financial Information

 

Item 1. 

Financial Statements

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Operations

 

Condensed Consolidated Statements of Comprehensive Income

 

Condensed Consolidated Statements of Equity

 

Condensed Consolidated Statements of Cash Flows

 

Notes to Condensed Consolidated Financial Statements

10 

 

Note 1 Business and Organization

10 

 

Note 2 Summary of Significant Accounting Policies

11 

 

Note 3 Acquisitions

17 

 

Note 4 Loans

19 

 

Note 5 Investment Securities

23 

 

Note 6 Properties

27 

 

Note 7 Investment in Unconsolidated Entities

28 

 

Note 8 Goodwill and Intangible Assets

28 

 

Note 9 Secured Financing Agreements

30 

 

Note 10 Convertible Senior Notes

32 

 

Note 11 Loan Securitization/Sale Activities

34 

 

Note 12 Derivatives and Hedging Activity

34 

 

Note 13 Offsetting Assets and Liabilities

37 

 

Note 14 Variable Interest Entities

37 

 

Note 15 Related-Party Transactions

38 

 

Note 16 Stockholders’ Equity

40 

 

Note 17 Earnings per Share

41 

 

Note 18 Accumulated Other Comprehensive Income

42 

 

Note 19 Fair Value

42 

 

Note 20 Income Taxes

46 

 

Note 21 Commitments and Contingencies

47 

 

Note 22 Segment Data

47 

 

Note 23 Subsequent Events

52 

Item 2. 

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

53 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

72 

Item 4. 

Controls and Procedures

74 

Part II 

Other Information

 

Item 1. 

Legal Proceedings

75 

Item 1A. 

Risk Factors

75 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

75 

Item 3. 

Defaults Upon Senior Securities

75 

Item 4. 

Mine Safety Disclosures

75 

Item 5. 

Other Information

75 

Item 6. 

Exhibits

77 

 

 

 

3


 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

(Unaudited, amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

March 31, 2016

 

December 31, 2015

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

335,219

 

$

368,815

Restricted cash

 

 

48,375

 

 

23,069

Loans held-for-investment, net

 

 

6,187,654

 

 

5,973,079

Loans held-for-sale, at fair value

 

 

154,225

 

 

203,865

Loans transferred as secured borrowings

 

 

88,512

 

 

86,573

Investment securities ($321,533 and $403,703 held at fair value)

 

 

649,364

 

 

724,947

Properties, net

 

 

1,154,975

 

 

919,225

Intangible assets ($95,492 and $119,698 held at fair value)

 

 

180,476

 

 

201,570

Investment in unconsolidated entities

 

 

196,637

 

 

199,201

Goodwill

 

 

140,437

 

 

140,437

Derivative assets

 

 

36,938

 

 

45,091

Accrued interest receivable

 

 

35,972

 

 

34,314

Other assets

 

 

111,860

 

 

102,479

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

 

 

85,115,662

 

 

76,675,689

Total Assets 

 

$

94,436,306

 

$

85,698,354

Liabilities and Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

139,286

 

$

156,805

Related-party payable

 

 

24,157

 

 

40,955

Dividends payable

 

 

114,839

 

 

114,947

Derivative liabilities

 

 

16,202

 

 

5,196

Secured financing agreements, net

 

 

4,480,960

 

 

3,980,699

Convertible senior notes, net

 

 

1,329,072

 

 

1,323,795

Secured borrowings on transferred loans

 

 

89,905

 

 

88,000

VIE liabilities, at fair value

 

 

84,151,022

 

 

75,817,014

Total Liabilities 

 

 

90,345,443

 

 

81,527,411

Commitments and contingencies (Note 21)

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

 

Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and outstanding

 

 

 —

 

 

 —

Common stock, $0.01 per share, 500,000,000 shares authorized, 242,218,855 issued and 237,611,970 outstanding as of March 31, 2016 and 241,044,775 issued and 237,490,779 outstanding as of December 31, 2015

 

 

2,422

 

 

2,410

Additional paid-in capital

 

 

4,210,904

 

 

4,192,844

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

 

 

(92,104)

 

 

(72,381)

Accumulated other comprehensive income

 

 

33,457

 

 

29,729

Accumulated deficit

 

 

(100,201)

 

 

(12,286)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,054,478

 

 

4,140,316

Non-controlling interests in consolidated subsidiaries

 

 

36,385

 

 

30,627

Total Equity 

 

 

4,090,863

 

 

4,170,943

Total Liabilities and Equity 

 

$

94,436,306

 

$

85,698,354

 

See notes to condensed consolidated financial statements.

4


 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Operations

(Unaudited, amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Revenues:

 

 

 

 

 

 

Interest income from loans

 

$

117,532

 

$

118,429

Interest income from investment securities

 

 

19,403

 

 

27,744

Servicing fees

 

 

24,691

 

 

28,257

Rental income

 

 

32,677

 

 

2,672

Other revenues

 

 

1,190

 

 

1,747

Total revenues 

 

 

195,493

 

 

178,849

Costs and expenses:

 

 

 

 

 

 

Management fees

 

 

24,963

 

 

27,968

Interest expense

 

 

56,520

 

 

50,534

General and administrative

 

 

32,798

 

 

35,264

Acquisition and investment pursuit costs

 

 

1,285

 

 

1,186

Costs of rental operations

 

 

12,655

 

 

1,698

Depreciation and amortization

 

 

18,760

 

 

4,085

Loan loss allowance, net

 

 

(761)

 

 

317

Other expense

 

 

100

 

 

375

Total costs and expenses 

 

 

146,320

 

 

121,427

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

 

 

49,173

 

 

57,422

Other income (loss):

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

(4,167)

 

 

47,861

Change in fair value of servicing rights

 

 

(6,739)

 

 

(1,542)

Change in fair value of investment securities, net

 

 

753

 

 

(499)

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

 

 

6,891

 

 

21,131

Earnings from unconsolidated entities

 

 

4,065

 

 

6,090

Gain on sale of investments and other assets, net

 

 

245

 

 

17,198

(Loss) gain on derivative financial instruments, net

 

 

(24,718)

 

 

24,623

Foreign currency loss, net

 

 

(378)

 

 

(30,307)

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

 

 

(54)

 

 

 —

Noncredit portion of OTTI recognized in other comprehensive income

 

 

54

 

 

 —

Net impairment losses recognized in earnings

 

 

 —

 

 

 —

Loss on extinguishment of debt

 

 

 —

 

 

(5,292)

Other income, net

 

 

2,015

 

 

45

Total other income (loss) 

 

 

(22,033)

 

 

79,308

Income before income taxes 

 

 

27,140

 

 

136,730

Income tax provision

 

 

(94)

 

 

(15,951)

Net income 

 

 

27,046

 

 

120,779

Net income attributable to non-controlling interests

 

 

(389)

 

 

(416)

Net income attributable to Starwood Property Trust, Inc.  

 

$

26,657

 

$

120,363

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Basic

 

$

0.11

 

$

0.53

Diluted

 

$

0.11

 

$

0.52

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.48

 

$

0.48

 

See notes to condensed consolidated financial statements.

 

 

5


 

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

   

2016

 

2015

Net income 

 

$

27,046

 

$

120,779

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

 

 

 

 

 

 

Cash flow hedges

 

 

(273)

 

 

(263)

Available-for-sale securities

 

 

(3,400)

 

 

(7,963)

Foreign currency remeasurement

 

 

7,401

 

 

(8,308)

Other comprehensive gain (loss)

 

 

3,728

 

 

(16,534)

Comprehensive income 

 

 

30,774

 

 

104,245

Less: Comprehensive income attributable to non-controlling interests

 

 

(389)

 

 

(416)

Comprehensive income attributable to Starwood Property Trust, Inc.  

 

$

30,385

 

$

103,829

 

See notes to condensed consolidated financial statements.

 

 

6


 

 

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited, amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Starwood

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Accumulated

 

Accumulated

 

Property

 

 

 

 

 

 

 

 

 

Common stock

 

Additional

 

 

 

 

 

 

Deficit)

 

Other

 

Trust, Inc.

 

Non-

 

 

 

 

 

 

 

 

Par

 

Paid-in

 

Treasury Stock

 

Retained

 

Comprehensive

 

Stockholders’

 

Controlling

 

Total

 

 

    

Shares

    

Value

    

Capital

    

Shares

    

Amount

    

Earnings

    

Income

    

Equity

    

Interests

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2016

 

241,044,775

 

$

2,410

 

$

4,192,844

 

3,553,996

 

$

(72,381)

 

$

(12,286)

 

$

29,729

 

$

4,140,316

 

$

30,627

 

$

4,170,943

 

Proceeds from DRIP Plan

 

4,411

 

 

 —

 

 

82

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

82

 

 

 —

 

 

82

 

Common stock repurchased

 

 —

 

 

 —

 

 

 —

 

1,052,889

 

 

(19,723)

 

 

 —

 

 

 —

 

 

(19,723)

 

 

 —

 

 

(19,723)

 

Share-based compensation

 

563,503

 

 

6

 

 

7,061

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,067

 

 

 —

 

 

7,067

 

Manager incentive fee paid in stock

 

606,166

 

 

6

 

 

10,917

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,923

 

 

 —

 

 

10,923

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

26,657

 

 

 —

 

 

26,657

 

 

389

 

 

27,046

 

Dividends declared, $0.48 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(114,572)

 

 

 —

 

 

(114,572)

 

 

 —

 

 

(114,572)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,728

 

 

3,728

 

 

 —

 

 

3,728

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(633)

 

 

(633)

 

Contributions from non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,584

 

 

6,584

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(582)

 

 

(582)

 

Balance, March 31, 2016

 

242,218,855

 

$

2,422

 

$

4,210,904

 

4,606,885

 

$

(92,104)

 

$

(100,201)

 

$

33,457

 

$

4,054,478

 

$

36,385

 

$

4,090,863

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

224,752,053

 

$

2,248

 

$

3,835,725

 

1,213,750

 

$

(23,635)

 

$

(9,378)

 

$

55,896

 

$

3,860,856

 

$

22,056

 

$

3,882,912

 

Proceeds from DRIP Plan

 

2,303

 

 

 —

 

 

55

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

55

 

 

 —

 

 

55

 

Equity component of 4.0% Convertible Senior Notes repurchase

 

 —

 

 

 —

 

 

(15,669)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(15,669)

 

 

 —

 

 

(15,669)

 

Share-based compensation

 

408,763

 

 

4

 

 

7,487

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,491

 

 

 —

 

 

7,491

 

Manager incentive fee paid in stock

 

387,299

 

 

3

 

 

9,442

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,445

 

 

 —

 

 

9,445

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

120,363

 

 

 —

 

 

120,363

 

 

416

 

 

120,779

 

Dividends declared, $0.48 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(108,435)

 

 

 —

 

 

(108,435)

 

 

 —

 

 

(108,435)

 

Other comprehensive loss, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(16,534)

 

 

(16,534)

 

 

 —

 

 

(16,534)

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

431

 

 

431

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(359)

 

 

(359)

 

Balance, March 31, 2015

 

225,550,418

 

$

2,255

 

$

3,837,040

 

1,213,750

 

$

(23,635)

 

$

2,550

 

$

39,362

 

$

3,857,572

 

$

22,544

 

$

3,880,116

 

 

See notes to condensed consolidated financial statements.

 

7


 

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

27,046

 

$

120,779

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

 

 

 

 

 

 

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

 

 

3,974

 

 

3,510

Amortization of convertible debt discount and deferred costs

 

 

5,277

 

 

5,363

Accretion of net discount on investment securities

 

 

(3,373)

 

 

(10,603)

Accretion of net deferred loan fees and discounts

 

 

(8,696)

 

 

(10,179)

Amortization of net discount from secured borrowings on transferred loans

 

 

 —

 

 

4

Share-based compensation

 

 

7,067

 

 

7,491

Share-based component of incentive fees

 

 

10,923

 

 

9,445

Change in fair value of fair value option investment securities

 

 

(753)

 

 

499

Change in fair value of consolidated VIEs

 

 

54,038

 

 

(5,657)

Change in fair value of servicing rights

 

 

6,739

 

 

1,542

Change in fair value of loans held-for-sale

 

 

(6,891)

 

 

(21,131)

Change in fair value of derivatives

 

 

23,557

 

 

(26,724)

Foreign currency loss, net

 

 

402

 

 

30,416

Gain on sale of investments and other assets

 

 

(245)

 

 

(17,198)

Loan loss allowance, net

 

 

(761)

 

 

317

Depreciation and amortization

 

 

16,759

 

 

3,692

Earnings from unconsolidated entities

 

 

(4,065)

 

 

(6,090)

Distributions of earnings from unconsolidated entities

 

 

5,729

 

 

7,030

Loss on extinguishment of debt

 

 

 —

 

 

5,292

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

 

 

(200,433)

 

 

(413,027)

Proceeds from sale of loans held-for-sale

 

 

256,964

 

 

482,009

Changes in operating assets and liabilities:

 

 

 

 

 

 

Related-party payable, net

 

 

(16,965)

 

 

(13,078)

Accrued and capitalized interest receivable, less purchased interest

 

 

(23,350)

 

 

(17,341)

Other assets

 

 

8,779

 

 

1,067

Accounts payable, accrued expenses and other liabilities

 

 

(30,593)

 

 

(23,282)

Net cash provided by operating activities

 

 

131,129

 

 

114,146

Cash Flows from Investing Activities:

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(472,237)

 

 

(649,886)

Proceeds from principal collections on loans

 

 

192,813

 

 

285,741

Proceeds from loans sold

 

 

97,882

 

 

85,121

Purchase of investment securities

 

 

(84,337)

 

 

(67,247)

Proceeds from sales of investment securities

 

 

 —

 

 

4,713

Proceeds from principal collections on investment securities

 

 

22,344

 

 

11,737

Deposit on property acquisition

 

 

 —

 

 

(18,178)

Real estate business combinations, net of cash acquired

 

 

(73,639)

 

 

 —

Proceeds from sale of properties

 

 

 —

 

 

33,056

Purchase of other assets

 

 

(2,846)

 

 

(435)

Investment in unconsolidated entities

 

 

(11)

 

 

(28,041)

Distribution of capital from unconsolidated entities

 

 

914

 

 

11,296

Payments for purchase or termination of derivatives

 

 

(12,611)

 

 

(6,117)

Proceeds from termination of derivatives

 

 

7,910

 

 

6,988

Return of investment basis in purchased derivative asset

 

 

69

 

 

90

(Increase) decrease in restricted cash, net

 

 

(24,930)

 

 

5,326

Net cash used in investing activities

 

 

(348,679)

 

 

(325,836)

 

See notes to condensed consolidated financial statements.

8


 

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Cash Flows from Financing Activities:

 

 

 

 

 

 

Borrowings under financing agreements

 

$

991,192

 

$

1,320,732

Principal repayments on and repurchases of borrowings

 

 

(626,462)

 

 

(847,288)

Payment of deferred financing costs

 

 

(5,969)

 

 

(1,263)

Proceeds from common stock issuances

 

 

82

 

 

55

Payment of dividends

 

 

(114,624)

 

 

(108,189)

Contributions from non-controlling interests

 

 

6,584

 

 

 —

Distributions to non-controlling interests

 

 

(582)

 

 

(359)

Purchase of treasury stock

 

 

(19,723)

 

 

 —

Issuance of debt of consolidated VIEs

 

 

596

 

 

6,763

Repayment of debt of consolidated VIEs

 

 

(55,729)

 

 

(51,538)

Distributions of cash from consolidated VIEs

 

 

7,545

 

 

3,790

Net cash provided by financing activities 

 

 

182,910

 

 

322,703

Net (decrease) increase in cash and cash equivalents

 

 

(34,640)

 

 

111,013

Cash and cash equivalents, beginning of period

 

 

368,815

 

 

255,187

Effect of exchange rate changes on cash

 

 

1,044

 

 

(5,480)

Cash and cash equivalents, end of period

 

$

335,219

 

$

360,720

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

50,254

 

$

48,448

Income taxes paid

 

 

922

 

 

2,903

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Fair value of assets acquired, net of cash

 

$

221,125

 

$

 —

Fair value of liabilities assumed

 

 

147,486

 

 

 —

Net assets acquired from consolidated VIEs

 

 

42,513

 

 

 —

Dividends declared, but not yet paid

 

 

114,572

 

 

108,435

Consolidation of VIEs (VIE asset/liability additions)

 

 

15,103,275

 

 

4,413,608

Deconsolidation of VIEs (VIE asset/liability reductions)

 

 

2,591,268

 

 

17,841

 

See notes to condensed consolidated financial statements.

 

9


 

 

Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of March 31, 2016

(Unaudited)

 

1. Business and Organization

 

Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering (“IPO”). We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate investments in both the U.S. and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

 

We have three reportable business segments as of March 31, 2016:

 

·

Real estate lending (the “Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS, RMBS and other real estate and real estate-related debt investments in both the U.S. and Europe that are held-for-investment.

 

·

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) servicing businesses in both the U.S. and Europe that manage and work out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions, and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

 

·

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

 

We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of our taxable income to our stockholders by prescribed dates and comply with various other requirements.

 

We are organized as a holding company and conduct our business primarily through our various wholly-owned subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms of a management agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded and controlled by Mr. Sternlicht.

 

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2. Summary of Significant Accounting Policies

 

Balance Sheet Presentation of the Investing and Servicing Segment’s Variable Interest Entities

 

As noted above, the Investing and Servicing Segment operates an investment business that acquires unrated, investment grade and non-investment grade rated CMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. Under accounting principles generally accepted in the United States of America (“GAAP”), SPEs typically qualify as VIEs. These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

 

Because the Investing and Servicing Segment often serves as the special servicer of the trusts in which it invests, consolidation of these structures is required pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator of these VIEs.

 

The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, an allocable portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.

 

Refer to the segment data in Note 22 for a presentation of the Investing and Servicing Segment without consolidation of these VIEs.

 

Basis of Accounting and Principles of Consolidation

 

The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.

 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the operating results for the full year.

 

Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, or (iii) became significant since December 31, 2015 due to a corporate action or increase in the significance of the underlying business activity.

 

Variable Interest Entities

 

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

11


 

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 first, identifying the activities that most significantly impact the VIE’s economic performance; and second, 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.

 

Effective January 1, 2016, we implemented Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, which specifies that 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.  In connection with the implementation of this ASU, we consolidated VIE assets and VIE liabilities from CMBS trusts as of March 31, 2016 where the right to remove the Company as special servicer was not exercisable without cause. Our implementation of the ASU also resulted in the determination that certain unconsolidated entities in which we hold passive non-controlling interests, which prior to the implementation of the ASU were not considered VIEs, are now considered VIEs as the limited partners of these entities do not collectively possess (i) the right to remove the general partner without cause or (ii) the right to participate in significant decisions made by the partnership.  We are not the primary beneficiaries of these VIEs as we do not possess the power to direct the activities of the VIE that most significantly impact their economic performance and therefore continue to report our interests within investment in unconsolidated entities on our condensed consolidated balance sheet.  We applied the provisions of this ASU using a modified retrospective approach which does not require the restatement of prior period financial statements.  There was no cumulative-effect adjustment to equity upon adoption.  Refer to Note 14 for further discussion of the impact of our implementation of ASU 2015-02.

 

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.

 

Our purchased investment securities include CMBS which are unrated and non-investment grade rated securities issued by CMBS trusts. In certain cases, we may contract to provide special servicing activities for these CMBS trusts, or, as holder of the controlling class, we may have the right to name and remove the special servicer for these trusts. In our role as special servicer, we provide services on defaulted loans within the trusts, such as foreclosure or work-out procedures, as permitted by the underlying contractual agreements. In exchange for these services, we receive a fee. These rights give us the ability to direct activities that could significantly impact the trust’s economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove us as special servicer without cause, we do not have the power to direct activities that most significantly impact the trust’s economic performance. We evaluated all of our positions in such investments for consolidation.

 

For VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, an allocable portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding allocable amortization or change in fair value of the servicing intangible asset, are also eliminated in consolidation.

12


 

 

We perform ongoing reassessments of: (1) 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 (2) 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 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 VIEs as individual line items on our condensed consolidated balance sheets.  The liabilities of our consolidated VIEs consist solely of obligations to the bondholders of the related CMBS trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our consolidated 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 VIE assets and are carried at fair value due to the election of the fair value option.  When an asset becomes REO, it is due to nonperformance of the loan.  Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value.  Furthermore, when we consolidate a CMBS trust, any existing REO would be consolidated at fair value.  Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.

 

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

 

REO assets generally represent a very small percentage of the overall asset pool of a CMBS trust.  In a new issue CMBS trust there are no REO assets.  We estimate that REO assets constitute approximately 4% of our consolidated VIE assets, with the remaining 96% representing loans.  However, it is important to note that the fair value of our VIE assets is determined by reference to our 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 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 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

13


 

reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.

 

We have elected the fair value option for eligible financial assets and liabilities of our consolidated VIEs, loans held-for-sale originated by the Investing and Servicing Segment’s conduit platform, purchased CMBS issued by VIEs we could consolidate in the future and certain investments in marketable equity securities. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for mortgage loans held-for-sale originated by the Investing and Servicing Segment’s conduit platform were made due to the short-term nature of these instruments. The fair value elections for investments in marketable equity securities were made because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market.

 

Fair Value Measurements

 

We measure our mortgage‑backed securities, derivative assets and liabilities, domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

 

As discussed above, we measure the assets and liabilities of consolidated VIEs at fair value pursuant to our election of the fair value option. The 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 VIE, we maximize the use of observable inputs over unobservable inputs. We also acknowledge that our principal market for selling CMBS assets is the securitization market where the market participant is considered to be a CMBS trust or a collateralized debt obligation (“CDO”). This methodology results in the fair value of the assets of a static CMBS trust being equal to the fair value of its liabilities. Refer to Note 19 for further discussion regarding our fair value measurements.

 

Loans Held-for-Investment and Provision for Loan Losses

 

Loans that are held‑for‑investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination costs as applicable, unless the loans are deemed impaired. We evaluate each loan classified as held‑for‑investment for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Actual losses, if any, could ultimately differ from these estimates.

 

We perform a quarterly review of our portfolio of loans. In connection with this review, we assess the performance of each loan and assign a risk rating based on several factors, including risk of loss, loan-to-collateral value ratio (“LTV”), collateral performance, structure, exit plan, and sponsorship. Loans are rated “1” through “5”, from less risk to greater risk, in connection with this review.

 

Deferred Financing Costs

In accordance with ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), effective January 1, 2016 we modified our presentation of deferred financing costs in our condensed consolidated balance sheets to present such costs as a direct deduction from the carrying value of the related debt liability, consistent with debt discounts, rather than as a separate deferred asset as the previous guidance required. Deferred financing costs will continue to be amortized to

14


 

interest expense over the terms of the respective debt agreements. As required by this ASU, we applied this change retrospectively to our prior period condensed consolidated balance sheet presentation.

Earnings Per Share

 

We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements.  Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) shares contingently issuable to our Manager, and (iii) the “in-the-money” conversion options associated with our outstanding convertible senior notes (see further discussion in 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.  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, 2016 and 2015, 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. Actual results could differ from those estimates. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our loans, investment securities and intangible assets, which has a significant impact on the amounts of interest income, credit losses (if any), and fair values that we record and/or disclose. In addition, the fair value of financial assets and liabilities that are estimated using a discounted cash flows method is significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.

 

Reclassifications

 

Certain prior period amounts have been reclassified to conform to our current period presentation.  In that regard, we have reclassified revenues of $2.7 million previously reported in other revenues to rental income in our condensed consolidated statement of operations for the three months ended March 31, 2015.  Expenses of $1.7 million previously reported in other expense have been reclassified to costs of rental operations in our condensed consolidated statement of operations for the three months ended March 31, 2015. 

 

Additionally, in connection with our implementation of ASU 2015-03 discussed above, we reclassified deferred financing costs of $38.3 million and $1.4 million previously reported in other assets to secured financing agreements, net and convertible senior notes, net, respectively, within our condensed consolidated balance sheet as of December 31, 2015.

 

Recent Accounting Developments

 

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts.  At issuance, the ASU was effective for the first interim or annual period beginning after December 15, 2016. On August 12, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year, resulting in the ASU becoming effective for the first interim or annual period beginning after December 15, 2017.  Early application, which was not permissible under the initial effectiveness timeline, is now permissible though no earlier than as of the first interim or annual period beginning after December 15, 2016.  We do not expect the application of this ASU to materially impact the Company.

15


 

 

On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which impacts the accounting for equity investments, financial liabilities under the fair value option, and disclosure requirements for financial instruments.  The ASU shall be applied prospectively and is effective for annual periods, and interim periods therein, beginning after December 15, 2017.  Early application is not permitted. We are in the process of assessing what impact this ASU will have on the Company.    

 

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee.  Lessor accounting was not significantly changed.  The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018 by applying a modified retrospective approach. Early application is permitted. We are in the process of assessing what impact this ASU will have on the Company. 

 

On March 14, 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815) – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that the change in counterparty to a derivative designated in a hedging relationship, in and of itself, would not require that the hedging relationship be de-designated for hedge accounting purposes. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.

 

On March 15, 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323) – Simplifying the Transition to the Equity Method of Accounting, which amends existing guidance to require that in instances where an investee is transitioning from the cost method of accounting to the equity method of accounting due to an increase in ownership level or degree of influence, the investee applies the equity method of accounting prospectively from the date significant influence is obtained, whereas existing guidance requires an investee to retrospectively apply the equity method of accounting for all previous periods in which the investment was held. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.

 

On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance and illustrations in the FASB’s revenue recognition standard issued in ASU 2014-09. The ASU provides further guidance to assist an entity in the determination of whether the nature of its promise to its customer is to provide the underlying goods or services, meaning the entity is a principal, or to arrange for a third party to provide the underlying goods or services, meaning the entity is an agent.  The ASU is effective for the first interim or annual period beginning after December 15, 2017.  Early application is permissible though no earlier than the first interim or annual period beginning after December 15, 2016.  We do not expect the application of this ASU to materially impact the Company.

 

On March 30, 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, which seeks to simplify the accounting for employee share-based payment transactions, including the accounting for associated income taxes and forfeitures. The ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted in any interim or annual period.  We do not expect the application of this ASU to materially impact the Company.

 

On April 14, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing, which amends guidance and illustrations in the FASB’s revenue recognition standard issued in ASU 2014-09 regarding the identification of performance obligations and the implementation guidance on licensing arrangements. The ASU is effective for the first interim or annual period beginning after December 15, 2017.  Early application is permissible though no earlier than the first interim or annual period beginning after December 15, 2016.  We do not expect the application of this ASU to materially impact the Company.

16


 

 

3.  Acquisitions 

 

Woodstar Portfolio Acquisition

 

During the three months ended March 31, 2016, we acquired 12 of the 32 affordable housing communities which comprise our “Woodstar Portfolio.”  The Woodstar Portfolio in its entirety is comprised of 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas and is 98% occupied.

 

The 12 affordable housing communities acquired during the three months ended March 31, 2016 comprise 3,082 units with total assets of $227.4 million and assumed liabilities of $147.5 million, which includes federal, state and county sponsored financing.  Refer to Note 9 for further discussion of these assumed debt facilities.

 

For the period from their respective acquisition dates through March 31, 2016, we recognized revenues of $5.6 million and a net loss of $0.8 million related to the 12 properties acquired into the Woodstar Portfolio.  Such net loss includes (i) depreciation and amortization expense of $3.2 million and (ii) one-time acquisition-related costs, such as legal and due diligence costs, of approximately $0.6 million.  No goodwill was recognized in connection with the Woodstar Portfolio acquisition as the purchase price equaled the fair value of the net assets acquired.

 

The remaining two properties in the Woodstar Portfolio not acquired prior to March 31, 2016 were acquired in April 2016. As of May 9, 2016, the initial accounting for these acquisitions was not sufficiently complete to allow for inclusion of the ASC 805 disclosures herein. Refer to Note 23 for further discussion.

 

Investing and Servicing Segment Property Portfolio

 

During the three months ended March 31, 2016, our Investing and Servicing Segment acquired controlling interests in two U.S. commercial real estate properties from CMBS trusts for $21.6 million. These properties, aggregated with the controlling interests in 14 U.S. commercial real estate properties acquired from CMBS trusts during the year ended December 31, 2015 for $138.7 million, comprise the Investing and Servicing Segment Property Portfolio (the “REO Portfolio”). When these properties are acquired from CMBS trusts that are consolidated as VIEs on our balance sheet, these acquisitions are reflected as repayment of debt of consolidated VIEs in our consolidated statement of cash flows. No goodwill was recognized in connection with the REO Portfolio acquisitions as the purchase price equaled the fair value of the net assets acquired.

 

Ireland Portfolio Acquisition

 

During 2015, we acquired 12 net leased fully occupied office properties and one multi-family property all located in Dublin, Ireland.  Collectively, these 13 properties comprise our “Ireland Portfolio”. 

 

The Ireland Portfolio, which collectively comprises approximately 600,000 square feet, included total assets of $518.2 million and assumed debt of $283.0 million at acquisition. Following our acquisition, all assumed debt was immediately extinguished and replaced with new financing of $328.6 million from the Ireland Portfolio Mortgage (as set forth in Note 9).  All properties within the Ireland Portfolio were acquired from entities controlled by the same third party investment fund. No goodwill was recognized in connection with the Ireland Portfolio acquisition as the purchase price equaled the fair value of the net assets acquired.

 

Purchase Price Allocations of Acquisitions

 

We applied the provisions of ASC 805, Business Combinations, in accounting for our acquisitions of the Woodstar Portfolio, the REO Portfolio and the Ireland Portfolio.  In doing so, we have recorded all identifiable assets acquired and liabilities assumed at fair value as of the respective acquisition dates.  These amounts for the Woodstar Portfolio, the REO Portfolio and the Ireland Portfolio are provisional and may be adjusted during the measurement period, which expires no later than one year from the acquisition dates, if new information is obtained that, if known, would have affected the amounts recognized as of the acquisition dates.

17


 

The following table summarizes the identified assets acquired and liabilities assumed at the respective acquisition dates (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

2015

 

    

Woodstar

    

REO

    

Woodstar

    

REO

    

Ireland

Assets acquired:

 

Portfolio

 

Portfolio

 

Portfolio

 

Portfolio

 

Portfolio

Cash and cash equivalents

 

$

6,254

 

$

 —

 

$

 —

 

$

 —

 

$

 —

Restricted cash

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,829

Properties

 

 

198,693

 

 

20,707

 

 

339,040

 

 

128,218

 

 

445,369

Intangible assets

 

 

6,837

 

 

5,558

 

 

11,337

 

 

19,381

 

 

59,529

Other assets

 

 

15,595

 

 

103

 

 

652

 

 

4,973

 

 

2,508

Total assets acquired

 

 

227,379

 

 

26,368

 

 

351,029

 

 

152,572

 

 

518,235

Liabilities assumed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

18,070

 

 

1,715

 

 

18,030

 

 

6,998

 

 

17,552

Secured financing agreements

 

 

129,416

 

 

 —

 

 

8,982

 

 

 —

 

 

283,010

Total liabilities assumed

 

 

147,486

 

 

1,715

 

 

27,012

 

 

6,998

 

 

300,562

Non-controlling interests

 

 

 —

 

 

3,084

 

 

 —

 

 

6,904

 

 

 —

Net assets acquired

 

$

79,893

 

$

21,569

 

$

324,017

 

$

138,670

 

$

217,673

 

Pro-Forma Operating Data

 

The pro-forma revenues and net income attributable to the Company for the three months ended March 31, 2016 and 2015, assuming the 30 properties acquired within the Woodstar Portfolio and all the properties within the REO Portfolio and the Ireland Portfolio were acquired on January 1, 2014 for the 2015 acquisitions and January 1, 2015 for the 2016 acquisitions, are as follows (amounts in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Revenues

 

$

198,616

 

$

211,448

Net income attributable to STWD

 

 

29,153

 

 

115,025

Net income per share - Basic

 

 

0.12

 

 

0.51

Net income per share - Diluted

 

 

0.12

 

 

0.50

 

Pro-forma net income was adjusted to include the following estimated incremental management fees the combined entity would have incurred (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Management fee expense addition

 

$

169

 

$

2,065

 

 

 

18


 

4. Loans

 

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. The following tables summarize our investments in mortgages and loans by subordination class as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

  

 

 

  

 

    

Weighted

 

 

 

 

 

 

 

 

Weighted

 

Average Life

 

 

Carrying

 

Face

 

Average

 

(“WAL”)

March 31, 2016

 

Value

 

Amount

 

Coupon

 

(years)(3)

First mortgages (1)

 

$

5,030,487

 

$

5,081,967

 

5.9

%  

2.4

Subordinated mortgages (2)

 

 

392,315

 

 

414,875

 

8.5

%  

3.2

Mezzanine loans (1)

 

 

770,120

 

 

754,284

 

9.9

%  

2.3

Total loans held-for-investment

 

 

6,192,922

 

 

6,251,126

 

 

 

 

Loans held-for-sale, fair value option elected

 

 

154,225

 

 

151,970

 

5.2

%  

9.8

Loans transferred as secured borrowings

 

 

88,512

 

 

89,905

 

6.1

%  

2.2

Total gross loans

 

 

6,435,659

 

 

6,493,001

 

 

 

 

Loan loss allowance (loans held-for-investment)

 

 

(5,268)

 

 

 —

 

 

 

 

Total net loans

 

$

6,430,391

 

$

6,493,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

First mortgages (1)

 

$

4,723,852

 

$

4,776,576

 

6.0

%  

2.7

Subordinated mortgages (2)

 

 

392,563

 

 

416,713

 

8.5

%  

3.4

Mezzanine loans (1)

 

 

862,693

 

 

850,024

 

9.9

%  

2.5

Total loans held-for-investment

 

 

5,979,108

 

 

6,043,313

 

 

 

 

Loans held-for-sale, fair value option elected

 

 

203,865

 

 

203,710

 

4.9

%  

9.8

Loans transferred as secured borrowings

 

 

86,573

 

 

88,000

 

6.1

%  

2.4

Total gross loans

 

 

6,269,546

 

 

6,335,023

 

 

 

 

Loan loss allowance (loans held-for-investment)

 

 

(6,029)

 

 

 —

 

 

 

 

Total net loans

 

$

6,263,517

 

$

6,335,023

 

 

 

 


(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 $1.0 billion and $930.0 million being classified as first mortgages as of March 31, 2016 and December 31, 2015, 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)

Represents the WAL of each respective group of loans 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.

 

19


 

As of March 31, 2016, approximately $5.3 billion, or 84.9%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.9%. The following table summarizes our investments in floating rate loans (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

    

 

    

Carrying

    

 

    

Carrying

 

Index

 

Base Rate

 

Value

 

Base Rate

 

Value

 

One-month LIBOR USD

 

0.4373

%

$

555,960

 

0.4295

%

$

438,641

 

Three-month LIBOR GBP

 

0.5881

%

 

366,478

 

0.5904

%

 

375,467

 

LIBOR floor

 

0.15 - 3.00

% (1)  

 

4,333,422

 

0.15 - 3.00

% (1)  

 

4,237,947

 

Total

 

 

 

$

5,255,860

 

 

 

$

5,052,055

 


(1)

The weighted-average LIBOR floor was 0.32% and 0.31% as of March 31, 2016 and December 31, 2015, respectively.

 

Our loans are typically collateralized by real estate. As a result, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’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 at maturity, and/or (iii) the property’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 properties. In addition, we consider the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such impairment 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.

 

Our evaluation process as described above produces an internal risk rating between 1 and 5, which is a weighted average of the numerical ratings in the following categories: (i) sponsor capability and financial condition, (ii) loan and collateral performance relative to underwriting, (iii) quality and stability of collateral cash flows, and (iv) loan structure. We utilize the overall risk ratings as a concise means to monitor any credit migration on a loan as well as on the whole portfolio. While the overall risk rating is generally not the sole factor we use in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment, and therefore would be more likely to experience a credit loss.

 

20


 

The rating categories generally include the characteristics described below, but these are utilized as guidelines and therefore not every loan will have all of the characteristics described in each category:

 

 

 

 

Rating

 

Characteristics

1

    

Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.

 

 

Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.

 

 

Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.

 

 

Loan structure—LTV does not exceed 65%. The loan has structural features that enhance the credit profile.

 

 

 

 

2

 

Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.

 

 

Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.

 

 

Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.

 

 

Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.

 

 

 

 

3

 

Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.

 

 

Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.

 

 

Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.

 

 

Loan structure—LTV does not exceed 80%.

 

 

 

 

4

 

Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.

 

 

Loan collateral and performance relative to underwriting—Property performance lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. A sale of the property may be necessary in order for the borrower to pay off the loan at maturity.

 

 

Quality and stability of collateral cash flows—Occupancy is not stabilized and the property has a large amount of rollover.

 

 

Loan structure—LTV is 80% to 90%.

 

 

 

 

5

 

Sponsor capability and financial condition—Credit history includes defaults, deeds‑in‑lieu, foreclosures, and/or bankruptcies.

 

 

Loan collateral and performance relative to underwriting—Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Sale proceeds would not be sufficient to pay off the loan at maturity.

 

 

Quality and stability of collateral cash flows—The property has material vacancy and significant rollover of remaining tenants.

 

 

Loan structure—LTV exceeds 90%.

 

21


 

As of March 31, 2016, the risk ratings for loans subject to our rating system, which excludes loans for which the fair value option has been elected, by class of loan were as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

Loans Held-For-Investment

 

 

 

 

Loans

 

 

 

 

 

 

 

    

 

    

 

  

 

    

Cost

  

 

    

Transferred

    

 

    

% of

 

Risk Rating

 

First

 

Subordinated

 

Mezzanine

 

Recovery

 

Loans Held-

 

As Secured

 

 

 

Total

 

Category

 

Mortgages

 

Mortgages

 

Loans

 

Loans

 

For-Sale

 

Borrowings

 

Total

 

Loans

 

1

 

$

6,533

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

6,533

 

0.1

%

2

 

 

477,910

 

 

85,363

 

 

98,656

 

 

 —

 

 

 —

 

 

 —

 

 

661,929

 

10.3

%

3

 

 

4,331,630

 

 

286,702

 

 

546,746

 

 

 —

 

 

 —

 

 

88,512

 

 

5,253,590

 

81.6

%

4

 

 

206,252

 

 

20,250

 

 

124,718

 

 

 —

 

 

 —

 

 

 —

 

 

351,220

 

5.5

%

5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

N/A

 

 

 —

 

 

 —

 

 

 —

 

 

8,162

 

 

154,225

 

 

 —

 

 

162,387

 

2.5

%

 

 

$

5,022,325

 

$

392,315

 

$

770,120

 

$

8,162

 

$

154,225

 

$

88,512

 

$

6,435,659

 

100.0

%

 

As of December 31, 2015, the risk ratings for loans subject to our rating system by class of loan were as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

Loans Held-For-Investment

 

 

 

 

Loans

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Cost

    

 

 

    

Transferred

    

 

 

    

% of

 

Risk Rating

 

First

 

Subordinated

 

Mezzanine

 

Recovery

 

Loans Held-

 

As Secured

 

 

 

 

Total

 

Category

 

Mortgages

 

Mortgages

 

Loans

 

Loans

 

For-Sale

 

Borrowings

 

Total

 

Loans

 

1

 

$

664

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

664

 

 —

%

2

 

 

496,372

 

 

88,857

 

 

90,449

 

 

 —

 

 

 —

 

 

 —

 

 

675,678

 

10.8

%

3

 

 

3,979,247

 

 

270,435

 

 

651,204

 

 

 —

 

 

 —

 

 

86,573

 

 

4,987,459

 

79.6

%

4

 

 

247,569

 

 

33,271

 

 

121,040

 

 

 —

 

 

 —

 

 

 —

 

 

401,880

 

6.4

%

5

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

%

N/A

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

203,865

 

 

 —

 

 

203,865

 

3.2

%

 

 

$

4,723,852

 

$

392,563

 

$

862,693

 

$

 —

 

$

203,865

 

$

86,573

 

$

6,269,546

 

100.0

%

 

After completing our impairment evaluation process, we concluded that no impairment charges were required on any individual loans held-for-investment as of March 31, 2016 or December 31, 2015, as we expect to collect all outstanding principal and interest.  During the three months ended March 31, 2016, our Investing and Servicing Segment acquired an $8.2 million non-performing commercial mortgage loan.  With the exception of this loan, none of our loans were 90 days or greater past due as of March 31, 2016.

 

In accordance with our policies, we record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” plus (ii) 5% of the aggregate carrying amount of loans rated as a “5.” The following table presents the activity in our allowance for loan losses (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

 

2016

    

2015

Allowance for loan losses at January 1

 

$

6,029

 

$

6,031

Provision for loan losses

 

 

(761)

 

 

317

Charge-offs

 

 

 —

 

 

Recoveries

 

 

 —

 

 

 —

Allowance for loan losses at March 31

 

$

5,268

 

$

6,348

Recorded investment in loans related to the allowance for loan loss

 

$

351,220

 

$

315,881

 

22


 

The activity in our loan portfolio was as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

 

2016

    

2015

Balance at January 1

 

$

6,263,517

 

$

6,300,285

Acquisitions/originations/additional funding

 

 

674,712

 

 

1,063,108

Capitalized interest (1)

 

 

21,290

 

 

17,490

Basis of loans sold (2)

 

 

(354,601)

 

 

(567,033)

Loan maturities/principal repayments

 

 

(195,073)

 

 

(320,379)

Discount accretion/premium amortization

 

 

8,696

 

 

10,179

Changes in fair value

 

 

6,891

 

 

21,131

Unrealized foreign currency remeasurement loss

 

 

(12,984)

 

 

(45,907)

Change in loan loss allowance, net

 

 

761

 

 

(317)

Transfer to/from other asset classifications

 

 

17,182

 

 

1,038

Balance at March 31

 

$

6,430,391

 

$

6,479,595

(1)

Represents accrued interest income on loans whose terms do not require current payment of interest.

(2)

See Note 11 for additional disclosure on these transactions.

 

5. Investment Securities

 

Investment securities were comprised of the following as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

Carrying Value as of

 

    

March 31, 2016

    

December 31, 2015

RMBS, available-for-sale

 

$

210,898

 

$

176,224

CMBS, fair value option (1)

 

 

1,012,618

 

 

1,038,200

Held-to-maturity (“HTM”) securities

 

 

327,831

 

 

321,244

Equity security, fair value option

 

 

13,911

 

 

14,498

SubtotalInvestment securities

 

 

1,565,258

 

 

1,550,166

VIE eliminations (1)

 

 

(915,894)

 

 

(825,219)

Total investment securities

 

$

649,364

 

$

724,947

(1)

Certain fair value option CMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810.

 

Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

CMBS, fair

 

HTM

 

Equity

 

 

 

 

    

RMBS

    

CMBS

  

value option

  

Securities

   

Security

   

Total

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

$

41,470

 

$

 —

 

$

33,173

 

$

9,694

 

$

 —

 

$

84,337

Sales

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Principal collections

 

 

6,811

 

 

 —

 

 

12,303

 

 

3,230

 

 

 —

 

 

22,344

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases

 

$

 —

 

$

 —

 

$

8,738

 

$

58,509

 

$

 —

 

$

67,247

Sales

 

 

 —

 

 

 —

 

 

4,713

 

 

 —

 

 

 —

 

 

4,713

Principal collections

 

 

11,487

 

 

224

 

 

1

 

 

25

 

 

 —

 

 

11,737

 

 

23


 

RMBS, Available-for-Sale

 

The Company classified all of its RMBS as available-for-sale as of March 31, 2016 and December 31, 2015. 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, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains or (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized in AOCI

 

 

 

 

   

Purchase

   

 

 

   

Recorded

   

 

 

   

Gross

   

Gross

   

Net

   

 

 

 

 

Amortized

 

Credit

 

Amortized

 

Non-Credit

 

Unrealized

 

Unrealized

 

Fair Value

 

 

 

 

 

Cost

 

OTTI

 

Cost

 

     OTTI     

 

Gains

 

Losses

 

Adjustment

 

Fair Value

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

187,176

 

$

(10,185)

 

$

176,991

 

$

(335)

 

$

34,242

 

$

 —

 

$

33,907

 

$

210,898

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

149,102

 

$

(10,185)

 

$

138,917

 

$

(340)

 

$

37,647

 

$

 —

 

$

37,307

 

$

176,224

 

 

 

 

 

 

 

 

 

 

    

Weighted Average Coupon (1)

    

Weighted Average
Rating

    

WAL 
(Years) (2)

March 31, 2016

 

 

 

 

 

 

RMBS

    

1.7

%  

CCC+

    

6.1

December 31, 2015

 

 

 

 

 

 

RMBS

 

1.3

%  

B−

 

6.2

(1)

Calculated using the March 31, 2016 and December 31, 2015 one-month LIBOR rate of 0.437% and 0.430%, respectively, for floating rate securities.

 

(2)

Represents the WAL of each respective group of securities as of the respective 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, 2016, approximately $159.4 million, or 75.6%, of our RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.02%. As of December 31, 2015, approximately $122.7 million, or 69.7%, of our RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.43%. We purchased all of the RMBS at a discount that will be 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 these discounts.

 

The following table contains a reconciliation of aggregate principal balance to amortized cost for our RMBS as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

Principal balance

 

$

327,167

 

$

233,976

 

Accretable yield

 

 

(67,626)

 

 

(68,345)

 

Non-accretable difference

 

 

(82,550)

 

 

(26,714)

 

Total discount

 

 

(150,176)

 

 

(95,059)

 

Amortized cost

 

$

176,991

 

$

138,917

 

 

The principal balance of credit deteriorated RMBS was $293.8 million and $199.0 million as of March 31, 2016 and December 31, 2015, respectively. Accretable yield related to these securities totaled $57.4 million and $57.7 million as of March 31, 2016 and December 31, 2015, respectively.

 

24


 

The following table discloses the changes to accretable yield and non-accretable difference for our RMBS during the three months ended March 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

    

 

    

Non-Accretable

Three Months Ended March 31, 2016

 

Accretable Yield

 

Difference

Balance as of January 1, 2016

 

$

68,345

 

$

26,714

Accretion of discount

 

 

(3,415)

 

 

 —

Principal write-downs

 

 

 —

 

 

(289)

Purchases

 

 

(618)

 

 

59,439

Sales

 

 

 —

 

 

 —

OTTI

 

 

 —

 

 

 —

Transfer to/from non-accretable difference

 

 

3,314

 

 

(3,314)

Balance as of March 31, 2016

 

$

67,626

 

$

82,550

 

Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed 10% of our total assets excluding the Investing and Servicing VIEs. We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.4 million for both the three months ended March 31, 2016 and 2015, which has been 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, 2016 and December 31, 2015, and for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

Unrealized Losses

 

 

    

Securities with a

    

Securities with a

    

Securities with a

    

Securities with a

 

 

 

loss less than

 

loss greater than

 

loss less than

 

loss greater than

 

 

 

12 months

 

12 months

 

12 months

 

12 months

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

15,466

 

$

643

 

$

(191)

 

$

(144)

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

17,026

 

$

653

 

$

(180)

 

$

(160)

 

 

As of March 31, 2016 and December 31, 2015, there were four securities and five securities, respectively, with unrealized losses reflected in the table above. After evaluating these securities and recording adjustments for credit-related OTTI, 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, which represent most of the OTTI we record on securities, 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 amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or impairments could be materially different from what is currently projected and/or reported.

 

25


 

CMBS, Fair Value Option

 

As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for the Investing and Servicing Segment’s CMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of March 31, 2016, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, were $1.0 billion and $4.6 billion, respectively. The $1.0 billion fair value balance represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($915.9 million at March 31, 2016, which includes $120.9 million of CMBS consolidated as a result of our implementation of ASU 2015-02) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS.

 

During the three months ended March 31, 2016, we purchased $46.6 million of CMBS, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $13.4 million of this amount is eliminated and reflected primarily as repayment of debt of consolidated VIEs in our condensed consolidated statement of cash flows.

 

As of March 31, 2016, none of our CMBS where we have elected the fair value option were variable rate. The table below summarizes various attributes of our investment in fair value option CMBS as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

Weighted Average Coupon

 

Weighted Average Rating (1)

 

WAL
(Years) (2)

March 31, 2016

    

 

    

 

    

 

CMBS, fair value option

 

5.5

%  

B−

 

2.0

December 31, 2015

 

 

 

 

 

 

CMBS, fair value option

 

3.9

%  

CCC+ 

 

7.4

(1)

As of March 31, 2016 and December 31, 2015, excludes $8.7 million and $51.3 million, respectively, in fair value option CMBS that are not rated.

 

(2)

The WAL of each security is calculated based on the period of time over which we expect to receive principal cash flows. Expected principal cash flows are based on contractual payments net of expected losses.

 

HTM Securities

 

The table below summarizes unrealized gains and losses of our investments in HTM securities as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Carrying Amount

 

Gross Unrealized

 

Gross Unrealized

 

 

 

 

 

 

(Amortized Cost)

 

Holding Gains

 

Holding Losses

 

Fair Value

 

March 31, 2016

    

 

 

    

 

 

    

 

 

    

 

 

 

CMBS

 

$

308,323

 

$

29

 

$

(14,573)

 

$

293,779

 

Preferred interests

 

 

19,508

 

 

1,884

 

 

 —

 

 

21,392

 

Total

 

$

327,831

 

$

1,913

 

$

(14,573)

 

$

315,171

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS

 

$

301,858

 

$

257

 

$

(5,651)

 

$

296,464

 

Preferred interests

 

 

19,386

 

 

 —

 

 

(595)

 

 

18,791

 

Total

 

$

321,244

 

$

257

 

$

(6,246)

 

$

315,255

 

 

26


 

The table below summarizes the maturities of our HTM CMBS and our HTM preferred equity interests in limited liability companies that own commercial real estate as of March 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

 

 

 

CMBS

 

Interests

 

Total

Less than one year

 

$

200,603

 

$

 —

 

$

200,603

One to three years

 

 

107,720

 

 

 —

 

 

107,720

Three to five years

 

 

 —

 

 

 —

 

 

 —

Thereafter

 

 

 —

 

 

19,508

 

 

19,508

Total

 

$

308,323

 

$

19,508

 

$

327,831

 

Equity Security, Fair Value Option

 

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. We have elected to report the investment using the fair value option because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market, and also due to potential lags in reporting resulting from differences in the respective regulatory requirements. The fair value of the investment remeasured in USD was $13.9 million and $14.5 million as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, our shares represent an approximate 3% interest in SEREF.

 

6. Properties

 

Our properties include the Woodstar Portfolio, the REO Portfolio and the Ireland Portfolio as discussed in Note 3. The below table summarizes our properties held as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Depreciable Life

    

March 31, 2016

    

December 31, 2015

Property Segment

 

 

 

 

 

 

 

 

Land

 

 —

 

$

295,345

 

$

236,545

Land improvements

 

5 – 10 years

 

 

19,900

 

 

11,044

Buildings

 

30 – 40 years

 

 

661,113

 

 

516,117

Furniture & fixtures

 

3 – 7 years

 

 

19,592

 

 

11,980

Investing and Servicing Segment

 

 

 

 

 

 

 

 

Land

 

 —

 

 

49,736

 

 

39,103

Buildings

 

20 – 40 years

 

 

120,718

 

 

110,815

Building improvements

 

7 – 15 years

 

 

3,688

 

 

1,709

Furniture & fixtures

 

3 – 5 years

 

 

892

 

 

680

Tenant improvements

 

3 – 5 years

 

 

239

 

 

67

Properties, cost

 

 

 

 

1,171,223

 

 

928,060

Less: accumulated depreciation

 

 

 

 

(16,248)

 

 

(8,835)

Properties, net

 

 

 

$

1,154,975

 

$

919,225

 

In March 2015, the Investing and Servicing Segment sold an operating property that we had previously acquired from a CMBS trust, which resulted in a $17.1 million gain on sale of investments and other assets in our condensed consolidated statement of operations for the three months ended March 31, 2015. There were no properties sold during the three months ended March 31, 2016.

27


 

 

 

 

7. Investment in Unconsolidated Entities

 

The below table summarizes our investments in unconsolidated entities as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Participation /

 

Carrying value as of

 

    

Ownership % (1)

    

March 31, 2016

    

December 31, 2015

Equity method:

 

 

 

 

 

 

 

 

Retail Fund

 

33%

 

$

121,297

 

$

122,454

Investor entity which owns equity in an online real estate auction company

 

50%

 

 

23,982

 

 

23,972

Equity interests in commercial real estate

 

16% - 43%

 

 

28,106

 

 

28,230

Various

 

25% - 50%

 

 

5,996

 

 

6,376

 

 

 

 

 

179,381

 

 

181,032

Cost method:

 

 

 

 

 

 

 

 

Investment funds which own equity in a loan servicer and other real estate assets

 

4% - 6%

 

 

9,225

 

 

9,225

Various

 

0% - 3%

 

 

8,031

 

 

8,944

 

 

 

 

 

17,256

 

 

18,169

 

 

 

 

$

196,637

 

$

199,201

(1)

None of these investments are publicly traded and therefore quoted market prices are not available.

 

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, 2016.

 

8. Goodwill and Intangible Assets

 

Goodwill

 

Goodwill at March 31, 2016 and December 31, 2015 represents the excess of consideration transferred over the fair value of net assets of LNR Property LLC (“LNR”) acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes an international 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 and European servicing rights that existed at the purchase date, based upon the expected future cash flows of the associated servicing contracts. All of our servicing fees are specified by these Pooling and Servicing Agreements. At March 31, 2016 and December 31, 2015, the balance of the domestic servicing intangible was net of $27.4 million and $11.8 million, respectively, that 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, 2016 and December 31, 2015, the domestic servicing intangible had a balance of $122.9 million and $131.5 million, respectively, which represents our economic interest in this asset.

 

28


 

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 noncancelable 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, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016

 

As of December 31, 2015

 

  

Gross Carrying

    

Accumulated

    

Net Carrying

    

Gross Carrying

    

Accumulated

    

Net Carrying

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

Domestic servicing rights, at fair value

 

$

95,492

 

$

 —

 

$

95,492

 

$

119,698

 

$

 —

 

$

119,698

European servicing rights (1)

 

 

30,778

 

 

(28,656)

 

 

2,122

 

 

31,593

 

 

(28,967)

 

 

2,626

In-place lease intangible assets

 

 

88,364

 

 

(19,899)

 

 

68,465

 

 

74,983

 

 

(8,898)

 

 

66,085

Favorable lease intangible assets

 

 

15,914

 

 

(1,517)

 

 

14,397

 

 

14,103

 

 

(942)

 

 

13,161

Total net intangible assets

 

$

230,548

 

$

(50,072)

 

$

180,476

 

$

240,377

 

$

(38,807)

 

$

201,570

(1)

The fair value as of March 31, 2016 and December 31, 2015 was $4.9 million and $5.3 million, respectively.

 

The following table summarizes the activity within intangible assets for the three months ended March 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic

 

European

 

In-place Lease

 

Favorable Lease

 

 

 

 

Servicing

 

Servicing

 

Intangible

 

Intangible

 

 

 

    

Rights

    

Rights

    

Assets

    

Assets

    

Total

Balance as of January 1, 2016

 

$

119,698

 

$

2,626

 

$

66,085

 

$

13,161

 

$

201,570

Impact of ASU 2015-02 Adoption (1)

 

 

(17,467)

 

 

 —

 

 

 —

 

 

 —

 

 

(17,467)

Acquisition of additional Woodstar Portfolio properties

 

 

 —

 

 

 —

 

 

6,837

 

 

 —

 

 

6,837

Acquisition of additional REO Portfolio properties

 

 

 —

 

 

 —

 

 

4,290

 

 

1,268

 

 

5,558

Amortization

 

 

 —

 

 

(435)

 

 

(10,716)

 

 

(528)

 

 

(11,679)

Foreign exchange (loss) gain

 

 

 —

 

 

(69)

 

 

1,969

 

 

496

 

 

2,396

Changes in fair value due to changes in inputs and assumptions

 

 

(6,739)

 

 

 —

 

 

 —

 

 

 —

 

 

(6,739)

Balance as of March 31, 2016

 

$

95,492

 

$

2,122

 

$

68,465

 

$

14,397

 

$

180,476

(1)

As discussed in Notes 2 and 14, our implementation of ASU 2015-02 resulted in the consolidation of certain CMBS trusts effective January 1, 2016, which required the elimination of $17.5 million of domestic servicing rights associated with these newly consolidated trusts.

 

The following table sets forth the estimated aggregate amortization of our European servicing rights, in-place lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):

 

 

 

 

 

 

 

 

 

2016 (remainder of)

    

$

18,931

2017

 

 

11,622

2018

 

 

10,080

2019

 

 

8,663

2020

 

 

6,708

Thereafter

 

 

28,980

Total

 

$

84,984

 

 

 

 

 

 

 

29


 

9. Secured Financing Agreements

 

The following table is a summary of our secured financing agreements in place as of March 31, 2016 and December 31, 2015 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying value at

 

 

 

Current 

 

Extended 

 

 

 

Pledged Asset

 

Maximum

 

March 31,

 

December 31,

 

 

 

  Maturity  

  

Maturity(a)

   

Pricing

   

Carrying Value

   

Facility Size

   

2016

   

2015

  

Lender 1 Repo 1

 

(b)

 

(b)

 

LIBOR + 1.85% to 5.25%

 

$

2,155,043

 

$

1,600,000

 

$

1,340,634

 

$

975,735

 

Lender 2 Repo 1

 

Oct 2017

 

Oct 2020

 

LIBOR + 1.75% to 2.75%

 

 

285,237

 

 

500,000

 

 

175,912

 

 

233,705

 

Lender 3 Repo 1

 

May 2017

 

May 2019

 

LIBOR + 2.50% to 2.85%

 

 

152,414

 

 

109,745

 

 

109,745

 

 

131,997

 

Lender 4 Repo 1

 

Oct 2016

 

Oct 2017

 

LIBOR + 2.00%

 

 

385,003

 

 

301,518

 

 

301,518

 

 

309,498

 

Lender 4 Repo 2

 

Dec 2018

 

Dec 2020

 

LIBOR + 2.50%

 

 

192,257

 

 

1,000,000

(c)

 

151,999

 

 

 —

 

Lender 6 Repo 1

 

Aug 2018

 

N/A

 

LIBOR + 2.50% to 3.00%

 

 

702,162

 

 

500,000

 

 

413,104

 

 

491,263

 

Lender 7 Secured Financing

 

Jul 2018

 

Jul 2019

 

LIBOR + 2.75%

(d)

 

109,285

 

 

650,000

(e)

 

 —

 

 

38,055

 

Conduit Repo 1

 

Sep 2016

 

N/A

 

LIBOR + 1.95% to 3.35%

 

 

 —

 

 

150,000

 

 

 —

 

 

80,741

 

Conduit Repo 2

 

Nov 2016

 

N/A

 

LIBOR + 2.10%

 

 

 —

 

 

150,000

 

 

 —

 

 

 —

 

Conduit Repo 3

 

Feb 2018

 

Feb 2019

 

LIBOR + 2.10%

 

 

96,986

 

 

150,000

 

 

71,599

 

 

66,041

 

Conduit Repo 4

 

Oct 2017

 

Oct 2020

 

LIBOR + 2.25%

 

 

16,842

 

 

100,000

 

 

12,188

 

 

 —

 

CMBS Repo 1

 

(f)

 

(f)

 

LIBOR + 1.90%

 

 

32,710

 

 

21,354

 

 

21,354

 

 

 —

 

CMBS Repo 2

 

Dec 2017

 

N/A

 

LIBOR + 2.35% to 2.70%

 

 

132,740

 

 

100,238

 

 

100,238

 

 

120,850

 

CMBS Repo 3

 

(g)

 

(g)

 

LIBOR + 1.40% to 1.85%

 

 

365,199

 

 

260,777

 

 

260,777

 

 

243,434

 

RMBS Repo 1

 

(h)

 

N/A

 

LIBOR + 1.90%

 

 

168,001

 

 

125,000

 

 

71,707

 

 

2,000

 

Investing and Servicing Segment Property Mortgages

 

June 2018 to Dec 2025

 

N/A

 

Various

 

 

133,136

 

 

106,055

 

 

100,715

 

 

82,964

 

Ireland Portfolio Mortgage

 

May 2020

 

N/A

 

EURIBOR + 1.69%

 

 

500,086

 

 

334,623

 

 

334,623

 

 

319,322

 

Woodstar Portfolio Mortgages

 

Nov 2025 to Jan 2026

 

N/A

 

3.72% to 3.81%

 

 

338,281

 

 

248,630

 

 

248,630

 

 

248,630

 

Woodstar Portfolio Government Financing

 

Mar 2026 to June 2049

 

N/A

 

1.00% to 5.00%

 

 

296,321

 

 

135,437

 

 

135,437

 

 

8,982

 

Term Loan

 

Apr 2020

 

N/A

 

LIBOR + 2.75%

(d)

 

3,015,838

 

 

656,578

 

 

656,578

 

 

658,270

 

FHLB Advances

 

Nov 2016

 

N/A

 

LIBOR + 0.37%

 

 

10,746

 

 

9,250

 

 

9,250

 

 

9,250

 

 

 

 

 

 

 

 

 

$

9,088,287

 

$

7,209,205

 

 

4,516,008

 

 

4,020,737

 

Unamortized premium (discount), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,099

 

 

(1,702)

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,147)

 

 

(38,336)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,480,960

 

$

3,980,699

 


(a)

Subject to certain conditions as defined in the respective facility agreement.

(b)

Maturity date for borrowings collateralized by loans is January 2017 before extension options and January 2019 assuming exercise of initial extension options.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed January 2023.

(c)

The initial maximum facility size of $600.0 million may be increased to $1.0 billion at our option, subject to certain conditions.

(d)

Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement. The term loan is also subject to a 75 basis point floor.

(e)

The initial maximum facility size of $450.0 million may be increased to $650.0 million at our option, subject to certain conditions.

(f)

Facility carries a rolling 11 month term which may reset monthly with the lender’s consent not to exceed December 2018. This facility carries no maximum facility size.  Amount herein reflects the outstanding balance as of March 31, 2016.

(g)

Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is March 2017. This facility carries no maximum facility size. Amount herein reflects the outstanding balance as of March 31, 2016.

(h)

The date that is 180 days after the buyer delivers notice to seller, subject to a maximum date of March 2017.

 

In the normal course of business, the Company is in discussions with its lenders to extend or amend any financing facilities which contain near term expirations.

30


 

 

During the three months ended March 31, 2016, we executed two mortgage facilities with aggregate borrowings of $16.0 million to finance commercial real estate acquired by our Investing and Servicing Segment. As of March 31, 2016, these facilities carry a remaining weighted average term of 4.9 years. One of the facilities carries a floating annual interest rate of LIBOR + 2.25% while the other facility carries a fixed annual interest rate of 3.00%.

 

During the three months ended March 31, 2016, we assumed 16 federal, state and county sponsored mortgage facilities (“Woodstar Portfolio Government Financing”) associated with certain properties acquired in our Woodstar Portfolio with aggregate outstanding balances of $126.7 million as of the acquisition dates. 

 

In January 2016, we amended the CMBS Repo 2 facility to extend the maturity from December 2016 to December 2017.

 

In March 2016, we amended the Lender 2 Repo 1 facility to upsize available borrowings from $500.0 million to $600.0 million. This additional $100.0 million of borrowing capacity is exclusively for the financing of conduit mortgage loans and therefore this component of the Lender 2 Repo 1 facility is separately presented in the secured financing agreements table above as Conduit Repo 4.

 

Our secured financing agreements contain certain financial tests and covenants. Should we breach certain of these covenants it may restrict our ability to pay dividends in the future. As of March 31, 2016, we were in compliance with all such covenants.

The following table sets forth our five‑year principal repayments schedule for secured financings assuming no defaults and excluding loans transferred as secured borrowings. 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 amount reflected in each period includes principal repayments on our credit facilities that would be required if (i) we received the repayments that we expect to receive on the investments that have been pledged as collateral under the credit facilities, as applicable, and (ii) the credit facilities that are expected to have amounts outstanding at their current maturity dates are extended where extension options are available to us (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Repurchase

    

Other Secured

    

 

 

 

Agreements

 

Financing

 

Total

2016 (remainder of)

    

$

353,820

    

$

16,384

    

$

370,204

2017

 

 

1,186,779

 

 

9,662

 

 

1,196,441

2018

 

 

641,989

 

 

29,373

 

 

671,362

2019

 

 

594,290

 

 

19,196

 

 

613,486

2020

 

 

174,303

 

 

979,305

 

 

1,153,608

Thereafter

 

 

79,594

 

 

431,313

 

 

510,907

Total

 

$

3,030,775

 

$

1,485,233

 

$

4,516,008

 

Secured financing maturities for 2016 primarily relate to $221.9 million on the Lender 6 Repo 1 facility and $71.6 million on the Conduit Repo 3 facility. 

 

For the three months ended March 31, 2016 and 2015, approximately $3.9 million and $3.5 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.

 

31


 

The following table sets forth our outstanding balance of repurchase agreements related to the following asset collateral classes as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

Class of Collateral

 

March 31, 2016

 

December 31, 2015

Loans held-for-investment

    

$

2,492,912

    

$

2,142,198

Loans held-for-sale

 

 

83,787

 

 

146,782

Investment securities

 

 

454,076

 

 

366,284

 

 

$

3,030,775

 

$

2,655,264

 

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 59% of these agreements, do not permit valuation adjustments based on capital markets activity.  Instead, margin calls on these facilities are limited to collateral-specific credit marks.  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 repurchase agreements containing margin call provisions for general capital markets activity, approximately 27% of these pertain to our loans held-for-sale, for which we manage credit risk through the purchase of credit index 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 agreements.

 

10. Convertible Senior Notes

 

On October 8, 2014, we issued $431.3 million of 3.75% Convertible Senior Notes due 2017 (the “2017 Notes”). On February 15, 2013, we issued $600.0 million of 4.55% Convertible Senior Notes due 2018 (the “2018 Notes”). On July 3, 2013, we issued $460.0 million of 4.00% Convertible Senior Notes due 2019 (the “2019 Notes”). The following summarizes the unsecured convertible senior notes (collectively, the “Convertible Notes”) outstanding as of March 31, 2016 (amounts in thousands, except rates):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

 

    

 

    

 

    

Remaining

 

 

 

Principal

 

Coupon

 

Effective

 

Conversion

 

Maturity

 

Period of

 

 

 

Amount

 

Rate

 

Rate(1)

 

Rate(2)

 

Date

 

Amortization

 

2017 Notes

 

$

431,250

 

3.75

%  

5.87

%  

41.7397

 

10/15/2017

 

1.5

years

 

2018 Notes

 

$

599,981

 

4.55

%  

6.10

%  

46.4599

 

3/1/2018

 

1.9

years

 

2019 Notes

 

$

341,363

 

4.00

%  

5.35

%  

49.2239

 

1/15/2019

 

2.8

years

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

 

 

March 31, 2016

 

December 31, 2015

 

Total principal

 

$

1,372,594

 

$

1,372,594

 

Unamortized discount

 

 

(42,241)

 

 

(47,351)

 

Unamortized deferred financing costs

 

 

(1,281)

 

 

(1,448)

 

Carrying amount of debt components

 

$

1,329,072

 

$

1,323,795

 

Carrying amount of conversion option equity components recorded in additional paid-in capital

 

$

46,343

 

$

46,343

 


(1)

Effective rate includes the effects of underwriter purchase discount and the adjustment for the conversion option, the value of which reduced the initial liability and was recorded in additional paid-in-capital.

 

(2)

The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of Convertible Notes converted, as adjusted in accordance with the indentures governing the Convertible Notes (including the applicable supplemental indentures) as a result of the spin-off of our former single family residential (“SFR”) segment to our stockholders in January 2014 and cash dividend payments.

 

32


 

The if‑converted value of the 2017 Notes, 2018 Notes and 2019 Notes was less than their principal amounts by $90.5 million, $72.2 million and $23.4 million at March 31, 2016, respectively, since the closing market price of the Company’s common stock of $18.93 per share was less than the implicit conversion prices of $23.96, $21.52 and $20.32, respectively. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash.  As a result, conversion of this principal amount, totaling 62.7 million shares, was not included in the computation of diluted EPS.  No dilution related to the Convertible Notes was included in the computation of diluted EPS for the three months ended March 31, 2016 as these notes were not “in-the-money”. See further discussion in Note 17.

 

We did not repurchase any Convertible Notes during the three months ended March 31, 2016. During the three months ended March 31, 2015, we repurchased $104.1 million aggregate principal amount of our 2019 Notes for $119.8 million plus transaction expenses of $0.1 million. The repurchase price was allocated between the fair value of the liability component and the fair value of the equity component of the convertible security. The portion of the repurchase price attributable to the equity component totaled $15.7 million and was recognized as a reduction of additional paid-in capital during the three months ended March 31, 2015. The remaining repurchase price was attributable to the liability component. The difference between this amount and the net carrying amount of the liability and debt issuance costs was reflected as a loss on extinguishment of debt in our condensed consolidated statement of operations. For the three months ended March 31, 2015, the loss on extinguishment of debt totaled $5.3 million, consisting principally of the write-off of unamortized debt discount.

 

Conditions for Conversion

 

Prior to April 15, 2017 for the 2017 Notes, September 1, 2017 for the 2018 Notes and July 15, 2018 for the 2019 Notes, the 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%, in the case of the 2017 Notes, or 130%, in the case of the 2018 Notes and the 2019 Notes, of the conversion price of the respective 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 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) other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.

 

On or after April 15, 2017, in the case of the 2017 Notes, September 1, 2017, in the case of the 2018 Notes, and July 15, 2018, in the case of the 2019 Notes, holders may convert each of their Convertible 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.

 

 

33


 

11. 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.

 

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. In certain instances, we retain a subordinated interest in the VIE and serve as special servicer for the VIE. The following summarizes the fair value and par value of loans sold from our conduit platform, as well as the amount of sale proceeds used in part to repay the outstanding balance of the repurchase agreements associated with these loans for the three months ended March 31, 2016 and 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Fair value of loans sold

 

$

256,964

 

$

482,009

Par value of loans sold

 

 

252,172

 

 

464,574

Repayment of repurchase agreements

 

 

189,207

 

 

344,378

 

Within the Lending Segment, we originate or acquire loans and then subsequently sell a portion, which can be in various forms including first mortgages, A-Notes, senior participations and mezzanine loans. 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. In certain instances, we continue to service the loan following its sale. The following table summarizes our loans sold and loans transferred as secured borrowings by the Lending Segment net of expenses (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Transfers

 

 

Loan Transfers Accounted

 

Accounted for as Secured

 

 

for as Sales

 

Borrowings

 

    

Face Amount

    

Proceeds

    

Face Amount

    

Proceeds

For the Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

$

98,537

 

$

97,882

 

$

 —

 

$

 —

2015

 

 

85,500

 

 

85,121

 

 

 —

 

 

 —

 

 

 

 

During the three months ended March 31, 2016 and 2015, gains recognized by the Lending Segment on sales of loans were not material. 

 

 

 

 

 

 

 

 

12. 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 13 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.

 

Designated Hedges

 

Our objective in using interest rate derivatives is to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

34


 

In connection with our repurchase agreements, we have entered into six outstanding interest rate swaps that have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of March 31, 2016, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $69.5 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.60% to 1.52% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges of interest rate risk have maturities ranging from August 2017 to May 2021.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2016 and 2015, we did not recognize any hedge ineffectiveness in earnings.

 

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next 12 months, we estimate that an additional $0.2 million will be reclassified as an increase to interest expense. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 62 months.

 

Non-designated Hedges

 

Derivatives not designated as hedges are derivatives that do not meet the criteria for hedge accounting under GAAP or which we have not elected to designate as hedges. We do not use these derivatives for speculative purposes but instead they are used to manage our exposure to foreign exchange rates, interest rate changes, and certain credit spreads. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in (loss) gain on derivative financial instruments in our condensed consolidated statements of operations.

 

We have entered into a series of forward contracts whereby we agreed to sell an amount of foreign currency for an agreed upon amount of USD at various dates through June 2020. These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments and properties.

 

The following table summarizes our non-designated foreign exchange (“Fx”) forwards, interest rate swaps, interest rate caps and credit index instruments as of March 31, 2016 (notional amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Aggregate

    

 

    

 

 

    

Number

    

Notional

    

Notional

    

 

Type of Derivative

    

of Contracts

    

Amount

    

Currency

    

Maturity

Fx contracts – Buy Danish Krone ("DKK")

 

1

 

69

 

DKK

 

December 2016

Fx contracts – Buy Euros ("EUR")

 

1

 

76

 

EUR

 

December 2016

Fx contracts – Buy Norwegian Krone ("NOK")

 

1

 

8

 

NOK

 

December 2016

Fx contracts – Buy Swedish Krona ("SEK")

 

1

 

844

 

SEK

 

December 2016

Fx contracts – Sell Danish Krone ("DKK")

 

1

 

6,251

 

DKK

 

December 2016

Fx contracts – Sell Euros ("EUR") (1)

 

82

 

343,717

 

EUR

 

May 2016 – June 2020

Fx contracts – Sell Pounds Sterling ("GBP")

 

61

 

239,773

 

GBP

 

April 2016 – March 2018

Fx contracts – Sell Norwegian Krone ("NOK")

 

1

 

878

 

NOK

 

December 2016

Fx contracts – Sell Swedish Krona ("SEK")

 

1

 

7,032

 

SEK

 

December 2016

Interest rate swaps – Paying fixed rates

 

37

 

281,472

 

USD

 

July 2016 – April 2026

Interest rate swaps – Receiving fixed rates

 

1

 

8,000

 

USD

 

July 2017

Interest rate caps

 

2

 

294,000

 

EUR

 

May 2020

Interest rate caps

 

4

 

34,543

 

USD

 

June 2018 – October 2020

Credit index instruments

 

9

 

36,000

 

USD

 

September 2058

Total

 

203

 

 

 

 

 

 


(1)

Includes 51 Fx contracts executed to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio.  As of March 31, 2016, these contracts have an aggregate notional amount of €249.4 million and varying maturities through June 2020.

35


 

 

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, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Derivatives

 

Fair Value of Derivatives

 

 

in an Asset Position (1) As of

 

in a Liability Position (2) As of

 

 

March 31,

 

December 31,

 

March 31,

 

December 31,

 

 

2016

 

2015

 

2016

 

2015

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

5

 

$

57

 

$

343

 

$

122

Total derivatives designated as hedging instruments

 

 

5

 

 

57

 

 

343

 

 

122

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and caps

 

 

1,303

 

 

2,360

 

 

12,458

 

 

4,970

Foreign exchange contracts

 

 

33,000

 

 

41,137

 

 

3,401

 

 

104

Credit index instruments

 

 

2,630

 

 

1,537

 

 

 —

 

 

 —

Total derivatives not designated as hedging instruments

 

 

36,933

 

 

45,034

 

 

15,859

 

 

5,074

Total derivatives 

 

$

36,938

 

$

45,091

 

$

16,202

 

$

5,196

(1)

Classified as derivative assets in our condensed consolidated balance sheets.

(2)

Classified as derivative liabilities in our condensed consolidated balance sheets.

 

The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations and of comprehensive income for the three months ended March 31, 2016 and 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Gain (Loss)

    

 

 

    

 

 

 

Gain (Loss)

 

Reclassified

 

Gain (Loss)

 

 

 

 

Recognized

 

from AOCI

 

Recognized

 

 

Derivatives Designated as Hedging Instruments

 

in OCI

 

into Income

 

in Income

 

Location of Gain (Loss)

For the Three Months Ended March 31,

 

(effective portion)

 

(effective portion)

 

(ineffective portion)

 

Recognized in Income

2016

 

$

(368)

 

$

(95)

 

$

 —

 

Interest expense

2015

 

$

(467)

 

$

(204)

 

$

 —

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss)

 

 

 

 

Recognized in Income for the

Derivatives Not Designated

 

Location of Gain (Loss)

 

Three Months Ended March 31,

as Hedging Instruments

    

Recognized in Income

    

2016

    

2015

Interest rate swaps and caps

 

(Loss) gain on derivative financial instruments

 

$

(18,000)

 

$

(12,923)

Foreign exchange contracts

 

(Loss) gain on derivative financial instruments

 

 

(6,550)

 

 

37,972

Credit index instruments

 

(Loss) gain on derivative financial instruments

 

 

(168)

 

 

(426)

 

 

 

 

$

(24,718)

 

$

24,623

 

 

36


 

13. Offsetting Assets and Liabilities

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(iv)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offset in the Statement

 

 

 

 

 

 

 

 

(ii)  

 

(iii) = (i) - (ii)

 

of Financial Position

 

 

 

 

    

 

 

    

Gross Amounts

    

Net Amounts

    

 

 

    

Cash

    

 

 

 

 

(i)

 

Offset in the

 

Presented in

 

 

 

 

Collateral

 

 

 

 

 

Gross Amounts

 

Statement of

 

the Statement of

 

Financial

 

Received /

 

(v) = (iii) - (iv)

 

 

Recognized

 

Financial Position

 

Financial Position

 

Instruments

 

Pledged

 

Net Amount

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

36,938

 

$

 —

 

$

36,938

 

$

3,817

 

$

 —

 

$

33,121

Derivative liabilities

 

$

16,202

 

$

 —

 

$

16,202

 

$

3,817

 

$

12,385

 

$

 —

Repurchase agreements

 

 

3,030,775

 

 

 —

 

 

3,030,775

 

 

3,030,775

 

 

 —

 

 

 —

 

 

$

3,046,977

 

$

 —

 

$

3,046,977

 

$

3,034,592

 

$

12,385

 

$

 —

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

45,091

 

$

 

$

45,091

 

$

243

 

$

 —

 

$

44,848

Derivative liabilities

 

$

5,196

 

$

 

$

5,196

 

$

243

 

$

4,953

 

$

 —

Repurchase agreements

 

 

2,655,264

 

 

 

 

2,655,264

 

 

2,655,264

 

 

 

 

 

 

$

2,660,460

 

$

 

$

2,660,460

 

$

2,655,507

 

$

4,953

 

$

 —

 

 

14. 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 and our retained interests in securitization transactions we initiated, all of which are generally considered to be variable interests in VIEs.

 

The 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, an allocable portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.

 

VIEs in which we are the Primary Beneficiary

 

As discussed in Note 2, our implementation of ASU 2015-02 resulted in the consolidation of certain CMBS trusts where the right to remove the Company as special servicer was not exercisable without cause.  These 14 trusts had $15.1 billion of VIE assets and $15.1 billion of VIE liabilities as of March 31, 2016.  The carrying value of our CMBS investments in these 14 trusts, totaling $120.9 million, was eliminated in consolidation against VIE liabilities as of March 31, 2016.   

 

The inclusion of the assets and liabilities of VIEs in which we are deemed the primary beneficiary has no economic effect on us. Our exposure to the obligations of 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.

37


 

 

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 (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 of March 31, 2016, one of our CDO structures was in default, which pursuant to the underlying indentures, changes the rights of the variable interest holders. Upon default of a CDO, the trustee or senior note holders are allowed to exercise certain rights, including liquidation of the collateral, which at that time, is the activity which would most significantly impact the CDO’s economic performance. Further, when the CDO is in default, the collateral administrator no longer has the option to purchase securities from the CDO. In cases where the CDO is in default and we do not have the ability to exercise rights which would most significantly impact the CDO’s economic performance, we do not consolidate the VIE. As of March 31, 2016, this CDO structure was not consolidated. 

 

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, 2016, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $96.7 million on a fair value basis.

 

As of March 31, 2016, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances of $24.3 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.

 

As discussed in Note 2, our implementation of ASU 2015-02 resulted in the determination that certain unconsolidated entities in which we hold passive non-controlling interests are now 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 continue to report our interests, which totaled $130.5 million as of March 31, 2016, within investment in unconsolidated entities on our condensed consolidated balance sheet.  Our maximum risk of loss is limited to our carrying value of the investments plus $29.2 million of remaining commitments related to one of these VIEs. These VIEs had assets of $2.0 billion and liabilities of $1.1 billion as of March 31, 2016.

 

15. 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 16 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.

 

38


 

Base Management Fee.  For the three months ended March 31, 2016 and 2015, approximately $15.1 million and $13.9 million, respectively, was incurred for base management fees. As of March 31, 2016 and December 31, 2015, there were $15.1 million and $15.2 million, respectively, of unpaid base management fees included in the related-party payable in our condensed consolidated balance sheets.

 

Incentive Fee.  For the three months ended March 31, 2016 and 2015, approximately $4.6 million and $6.7 million, respectively, was incurred for incentive fees. As of March 31, 2016 and December 31, 2015, approximately $4.6 million and $21.8 million, respectively, of unpaid incentive fees were included in related-party payable in our condensed consolidated balance sheets.

 

Expense Reimbursement.  For the three months ended March 31, 2016 and 2015, approximately $1.1 million and $1.3 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, 2016 and December 31, 2015, approximately $3.9 million and $3.6 million, respectively, of unpaid reimbursable executive compensation and other expenses were 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, 2016 and 2015, we granted 162,546 and 23,677 RSAs, respectively, at grant date fair values of $3.1 million and $0.6 million, respectively. These shares generally vest over a three-year period. Expenses related to the vesting of awards to employees of affiliates of our Manager were $0.4 million and immaterial during the three months ended March 31, 2016 and 2015, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations

 

Manager Equity Plan

 

In May 2015, we granted 675,000 RSUs to our Manager under the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”).  In connection with this grant and prior similar grants, we recognized share-based compensation expense of $4.8 million and $7.0 million within management fees in our condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015, respectively. Refer to Note 16 for further discussion of these grants.

 

Investments in Loans and Securities

 

In December 2013, we acquired a subordinate CMBS investment in a securitization issued by an affiliate of our Manager. The security was acquired for $84.1 million and is secured by five regional malls in Ohio, California and Washington.  In January 2016, we acquired an additional $9.7 million of this subordinate CMBS investment.

 

Acquisitions from Consolidated CMBS Trusts

 

Our Investing and Servicing Segment acquires controlling interests in properties for its REO Portfolio from CMBS trusts, some of which are consolidated as VIEs on our balance sheet.  Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.  During the three months ended March 31, 2016, we acquired $24.7 million of net real estate assets from consolidated CMBS trusts. Refer to Note 3 for further discussion of these acquisitions. 

 

Our Investing and Servicing Segment also acquires controlling interests in performing and non-performing commercial mortgage loans from CMBS trusts, some of which are consolidated as VIEs on our balance sheet. Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.  During the three months ended March 31, 2016, we acquired $9.7 million and $8.2 million of performing and non-performing loans, respectively, from consolidated CMBS trusts.

 

39


 

Other Related-Party Arrangements

 

During the three months ended March 31, 2016, we established a co-investment fund which provides key personnel with the opportunity to invest in certain properties included in our REO Portfolio.  These personnel include certain of our employees as well as employees of affiliates of our Manager (collectively “Fund Participants”).  The fund carries an aggregate commitment of $15.0 million and owns a 10% equity interest in REO Portfolio properties acquired subsequent to January 1, 2015.  Of this commitment, Fund Participants have contributed $3.5 million through March 31, 2016, with a maximum expected capital contribution amount of $4.9 million.  The capital contributed by Fund Participants to date is reflected on our condensed consolidated balance sheet as non-controlling interests in consolidated subsidiaries.  In an effort to retain key personnel, the fund provides for disproportionate distributions which allows Fund Participants to earn an incremental 60% on all operating cash flows attributable to their capital account, net of a preferred return to us as general partner of the fund.  Amounts earned by Fund Participants pursuant to this waterfall are reflected within net income attributable to non-controlling interests in our condensed consolidated statement of operations.  During the three months ended March 31, 2016, the non-controlling interests related to this fund recognized an immaterial loss.

 

Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.

 

16. Stockholders’ Equity

 

During the three months ended March 31, 2016, our board of directors declared the following dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Declare Date

    

Record Date

    

Ex-Dividend Date

    

Payment Date

    

Amount

    

Frequency

2/25/16

 

3/31/16

 

3/29/16

 

4/15/16

 

$

0.48

 

Quarterly

 

During the three months ended March 31, 2016, there were no shares issued under our At-The-Market Equity Offering Sales Agreement (the “ATM Agreement”).  During the three months ended March 31, 2016, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.

 

During the three months ended March 31, 2016, we repurchased 1,052,889 shares of common stock for $19.7 million under our $500.0 million repurchase program.  Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further information regarding the repurchase program.  As of March 31, 2016, we have $282.1 million of remaining capacity to repurchase common stock or Convertible Notes under the repurchase program through January 2017.

 

Equity Incentive Plans

 

The Company currently maintains the Manager Equity Plan, the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”), and the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (“Non-Executive Director Stock Plan”).  Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further information regarding these plans.

 

The table below summarizes our share awards granted or vested under the Manager Equity Plan during the three months ended March 31, 2016 and 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Grant Date

    

Type

    

Amount Granted

    

Grant Date Fair Value

    

Vesting Period

 

May 2015

 

RSU

 

675,000

 

$

16,511

 

3 years

 

January 2014

 

RSU

 

489,281

 

 

14,776

 

3 years

 

January 2014

 

RSU

 

2,000,000

 

 

55,420

 

3 years

 

 

As of March 31, 2016, there were 2.3 million shares available for future grants under the Manager Equity Plan, the Equity Plan and the Non-Executive Director Stock Plan.

40


 

 

Schedule of Non-Vested Shares and Share Equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Executive

 

 

 

 

 

 

 

Weighted Average

 

 

 

Director

 

 

 

Manager

 

 

 

Grant Date Fair Value

 

 

 

Stock Plan

 

Equity Plan

 

Equity Plan

 

Total

 

(per share)

 

Balance as of January 1, 2016

 

16,988

 

548,378

 

1,302,850

 

1,868,216

 

$

25.84

 

Granted

 

3,776

 

339,806

 

 —

 

343,582

 

 

18.72

 

Vested

 

 —

 

(247,780)

 

(255,400)

 

(503,180)

 

 

25.55

 

Forfeited

 

 —

 

(15,684)

 

 —

 

(15,684)

 

 

24.17

 

Balance as of March 31, 2016

 

20,764

 

624,720

 

1,047,450

 

1,692,934

 

 

24.49

 

 

 

17. Earnings per Share

 

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,

 

 

    

2016

    

2015

    

Basic Earnings

 

 

 

 

 

 

 

Income attributable to STWD common stockholders

 

$

26,657

 

$

120,363

 

Less: Income attributable to participating shares

 

 

(708)

 

 

(972)

 

Basic earnings

 

$

25,949

 

$

119,391

 

 

 

 

 

 

 

 

 

Diluted Earnings

 

 

 

 

 

 

 

Basic — Income attributable to STWD common stockholders

 

$

26,657

 

$

120,363

 

Less: Income attributable to participating shares

 

 

(708)

 

 

(972)

 

Add: Undistributed earnings to participating shares

 

 

 —

 

 

106

 

Less: Undistributed earnings reallocated to participating shares

 

 

 —

 

 

(104)

 

Diluted earnings

 

$

25,949

 

$

119,393

 

 

 

 

 

 

 

 

 

Number of Shares:

 

 

 

 

 

 

 

Basic — Average shares outstanding

 

 

236,556

 

 

223,541

 

Effect of dilutive securities — Convertible Notes

 

 

 —

 

 

5,353

 

Effect of dilutive securities — Contingently issuable shares

 

 

121

 

 

138

 

Effect of dilutive securities — Unvested non-participating shares

 

 

82

 

 

 —

 

Diluted — Average shares outstanding

 

 

236,759

 

 

229,032

 

 

 

 

 

 

 

 

 

Earnings Per Share Attributable to STWD Common Stockholders:

 

 

 

 

 

 

 

Basic

 

$

0.11

 

$

0.53

 

Diluted

 

$

0.11

 

$

0.52

 

 

As of March 31, 2016 and 2015, participating shares of 1.5 million and 1.8 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.

 

Also as of March 31, 2016, there were 62.7 million potential shares of common stock contingently issuable upon the conversion of the Convertible Notes.  The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash.  As a result, this principal amount, representing 62.7 million shares at March 31, 2016, was not included in the computation of diluted EPS.  As discussed in Note 10, the conversion options associated with the Convertible Notes are “out-of-the-money” because the if-converted value of the 2017, 2018 and 2019 Convertible Notes was less than their principal amount by $90.5 million, $72.2 million and $23.4 million, respectively, at March 31, 2016. Therefore, there was no dilutive effect to EPS for the Convertible Notes.

41


 

 

18. Accumulated Other Comprehensive Income

 

The changes in AOCI by component are as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Cumulative

    

 

 

    

 

 

 

 

 

 

 

Unrealized Gain

 

 

 

 

 

 

 

 

Effective Portion of

 

(Loss) on

 

Foreign

 

 

 

 

 

Cumulative Loss on

 

Available-for-

 

Currency

 

 

 

 

 

Cash Flow Hedges

 

Sale Securities

 

Translation

 

Total

Three Months Ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

$

(65)

 

$

37,307

 

$

(7,513)

 

$

29,729

OCI before reclassifications

 

 

(368)

 

 

(3,400)

 

 

7,401

 

 

3,633

Amounts reclassified from AOCI

 

 

95

 

 

 —

 

 

 —

 

 

95

Net period OCI

 

 

(273)

 

 

(3,400)

 

 

7,401

 

 

3,728

Balance at March 31, 2016

 

$

(338)

 

$

33,907

 

$

(112)

 

$

33,457

Three Months Ended March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2015

 

$

(97)

 

$

60,190

 

$

(4,197)

 

$

55,896

OCI before reclassifications

 

 

(467)

 

 

(2,567)

 

 

(8,308)

 

 

(11,342)

Amounts reclassified from AOCI

 

 

204

 

 

(5,396)

 

 

 —

 

 

(5,192)

Net period OCI

 

 

(263)

 

 

(7,963)

 

 

(8,308)

 

 

(16,534)

Balance at March 31, 2015

 

$

(360)

 

$

52,227

 

$

(12,505)

 

$

39,362

 

The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015 as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts Reclassified from

 

 

 

 

AOCI during the Three Months

 

Affected Line Item

 

 

Ended March 31,

 

in the Statements

Details about AOCI Components

    

2016

    

2015

    

of Operations

Losses on cash flow hedges:

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

(95)

 

$

(204)

 

Interest expense

Unrealized gains (losses) on available-for-sale securities:

 

 

 

 

 

 

 

 

Interest realized upon collection

 

 

 —

 

 

5,396

 

Interest income from investment securities

Total reclassifications for the period

 

$

(95)

 

$

5,192

 

 

 

 

19. Fair Value

 

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.

 

42


 

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.  Refer to Note 20 to the consolidated financial statements included in our Form 10-K for further discussion of our valuation process.

 

We determine the fair value of our assets and liabilities measured at fair value on a recurring and nonrecurring basis in accordance with the methodology described in our Form 10-K.

 

Fair Value Disclosures

 

The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

    

Total

    

Level I

    

Level II

    

Level III

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale, fair value option

 

$

154,225

 

$

 —

 

$

 —

 

$

154,225

RMBS

 

 

210,898

 

 

 —

 

 

 —

 

 

210,898

CMBS

 

 

96,724

 

 

 —

 

 

 —

 

 

96,724

Equity security

 

 

13,911

 

 

13,911

 

 

 —

 

 

 —

Domestic servicing rights

 

 

95,492

 

 

 —

 

 

 —

 

 

95,492

Derivative assets

 

 

36,938

 

 

 —

 

 

36,938

 

 

 —

VIE assets

 

 

85,115,662

 

 

 —

 

 

 —

 

 

85,115,662

Total 

 

$

85,723,850

 

$

13,911

 

$

36,938

 

$

85,673,001

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

16,202

 

$

 —

 

$

16,202

 

$

 —

VIE liabilities

 

 

84,151,022

 

 

 —

 

 

81,112,488

 

 

3,038,534

Total 

 

$

84,167,224

 

$

 —

 

$

81,128,690

 

$

3,038,534

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

    

Total

    

Level I

    

Level II

    

Level III

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale, fair value option

 

$

203,865

 

$

 —

 

$

 —

 

$

203,865

RMBS

 

 

176,224

 

 

 —

 

 

 —

 

 

176,224

CMBS

 

 

212,981

 

 

 —

 

 

 —

 

 

212,981

Equity security

 

 

14,498

 

 

14,498

 

 

 —

 

 

 —

Domestic servicing rights

 

 

119,698

 

 

 

 

 

 —

 

 

119,698

Derivative assets

 

 

45,091

 

 

 —

 

 

45,091

 

 

 —

VIE assets

 

 

76,675,689

 

 

 —

 

 

 —

 

 

76,675,689

Total 

 

$

77,448,046

 

$

14,498

 

$

45,091

 

$

77,388,457

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

5,196

 

$

 —

 

$

5,196

 

$

 —

VIE liabilities

 

 

75,817,014

 

 

 —

 

 

73,264,566

 

 

2,552,448

Total 

 

$

75,822,210

 

$

 —

 

$

73,269,762

 

$

2,552,448

 

43


 

The changes in financial assets and liabilities classified as Level III are as follows for the three months ended March 31, 2016 and 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Domestic

    

 

 

    

 

 

    

 

 

 

 

Loans

 

 

 

 

 

 

 

Servicing

 

 

 

 

VIE

 

 

 

Three Months Ended March 31, 2016

 

Heldforsale

 

RMBS

 

CMBS

 

Rights

 

VIE Assets

 

Liabilities

 

Total

January 1, 2016 balance

 

$

203,865

 

$

176,224

 

$

212,981

 

$

119,698

 

$

76,675,689

 

$

(2,552,448)

 

$

74,836,009

Impact of ASU 2015-02 Adoption (1)

 

 

 —

 

 

 —

 

 

 —

 

 

(17,467)

 

 

17,467

 

 

 —

 

 

 —

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value / gain on sale

 

 

6,891

 

 

 —

 

 

967

 

 

(6,739)

 

 

(4,089,501)

 

 

236,123

 

 

(3,852,259)

Net accretion

 

 

 —

 

 

3,415

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,415

Included in OCI

 

 

 —

 

 

(3,400)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,400)

Purchases / Originations

 

 

200,570

 

 

41,470

 

 

33,173

 

 

 —

 

 

 —

 

 

 —

 

 

275,213

Sales

 

 

(256,964)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(256,964)

Issuances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(596)

 

 

(596)

Cash repayments / receipts

 

 

(137)

 

 

(6,811)

 

 

(12,303)

 

 

 —

 

 

 —

 

 

5,850

 

 

(13,401)

Transfers into Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(415,044)

 

 

(415,044)

Transfers out of Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

110,965

 

 

110,965

Consolidation of VIEs

 

 

 —

 

 

 —

 

 

(138,342)

 

 

 —

 

 

15,103,275

 

 

(430,653)

 

 

14,534,280

Deconsolidation of VIEs

 

 

 —

 

 

 —

 

 

248

 

 

 —

 

 

(2,591,268)

 

 

7,269

 

 

(2,583,751)

March 31, 2016 balance

 

$

154,225

 

$

210,898

 

$

96,724

 

$

95,492

 

$

85,115,662

 

$

(3,038,534)

 

$

82,634,467

Amount of total gains (losses) included in earnings attributable to assets still held at March 31, 2016

 

$

2,162

 

$

3,415

 

$

1,499

 

$

(6,739)

 

$

(4,089,501)

 

$

236,123

 

$

(3,853,041)

(1)

As discussed in Notes 2 and 14, our implementation of ASU 2015-02 resulted in the consolidation of certain CMBS trusts effective January 1, 2016, which required the elimination of $17.5 million of domestic servicing rights associated with these newly consolidated trusts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Domestic

    

 

 

    

 

 

    

 

 

 

 

Loans

 

 

 

 

 

 

 

Servicing

 

 

 

 

VIE

 

 

 

Three Months Ended March 31, 2015

 

Heldforsale

 

RMBS

 

CMBS

 

Rights

 

VIE Assets

 

Liabilities

 

Total

January 1, 2015 balance

 

$

391,620

 

$

207,053

 

$

334,080

 

$

132,303

 

$

107,816,065

 

$

(4,893,120)

 

$

103,988,001

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value / gain on sale

 

 

21,131

 

 

 —

 

 

(160)

 

 

(1,542)

 

 

(8,847,854)

 

 

2,460,672

 

 

(6,367,753)

Net accretion

 

 

 —

 

 

9,445

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

9,445

Included in OCI

 

 

 —

 

 

(7,626)

 

 

(5,216)

 

 

 —

 

 

 —

 

 

 —

 

 

(12,842)

Purchases / Originations

 

 

413,221

 

 

 —

 

 

8,738

 

 

 —

 

 

 —

 

 

 —

 

 

421,959

Sales

 

 

(482,009)

 

 

 —

 

 

(4,713)

 

 

 —

 

 

 —

 

 

 —

 

 

(486,722)

Issuances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,763)

 

 

(6,763)

Cash repayments / receipts

 

 

(193)

 

 

(11,487)

 

 

(225)

 

 

 —

 

 

 —

 

 

47,936

 

 

36,031

Transfers into Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(192,481)

 

 

(192,481)

Transfers out of Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

549,370

 

 

549,370

Consolidation of VIEs

 

 

 —

 

 

 —

 

 

(24,309)

 

 

 —

 

 

4,413,608

 

 

(111,072)

 

 

4,278,227

Deconsolidation of VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(17,841)

 

 

 —

 

 

(17,841)

March 31, 2015 balance

 

$

343,770

 

$

197,385

 

$

308,195

 

$

130,761

 

$

103,363,978

 

$

(2,145,458)

 

$

102,198,631

Amount of total gains (losses) included in earnings attributable to assets still held at March 31, 2015

 

$

4,788

 

$

3,952

 

$

(1,101)

 

$

(1,542)

 

$

(8,847,854)

 

$

2,460,672

 

$

(6,381,085)

 

 

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.

 

44


 

The following table presents the fair values, all of which are classified in Level III of the fair value hierarchy, of our financial instruments not carried at fair value on the condensed consolidated balance sheets (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

    

Carrying

    

Fair

    

Carrying

    

Fair

 

 

Value

 

Value

 

Value

 

Value

Financial assets not carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-investment and loans transferred as secured borrowings

 

$

6,276,166

 

$

6,339,187

 

$

6,059,652

 

$

6,125,881

HTM securities

 

 

327,831

 

 

315,171

 

 

321,244

 

 

315,255

European servicing rights

 

 

2,122

 

 

4,895

 

 

2,626

 

 

5,302

Financial liabilities not carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Secured financing agreements and secured borrowings on transferred loans

 

$

4,570,865

 

$

4,568,435

 

$

4,068,699

 

$

4,092,264

Convertible senior notes

 

 

1,329,072

 

 

1,292,296

 

 

1,323,795

 

 

1,331,979

 

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 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value at

 

Valuation

 

Unobservable

 

Range as of (1)

 

   

March 31, 2016

   

Technique

   

Input

   

March 31, 2016

   

December 31, 2015

Loans held-for-sale, fair value option

 

$

154,225

 

Discounted cash flow

 

Yield (b)

 

4.7% - 5.7%

 

4.8% - 5.3%

 

 

 

 

 

 

 

Duration (c)

 

5.0 - 10.0 years

 

5.0 - 10.0 years

RMBS

 

 

210,898

 

Discounted cash flow

 

Constant prepayment rate (a)

 

2.7% - 15.6%

 

2.6% - 17.8%

 

 

 

 

 

 

 

Constant default rate (b)

 

1.0% - 8.7%

 

1.0% - 8.9%

 

 

 

 

 

 

 

Loss severity (b)

 

7% - 80% (e)

 

10% - 79% (e)

 

 

 

 

 

 

 

Delinquency rate (c)

 

2% - 29%

 

2% - 29%

 

 

 

 

 

 

 

Servicer advances (a)

 

29% - 93%

 

30% - 94%

 

 

 

 

 

 

 

Annual coupon deterioration (b)

 

0% - 0.4%

 

0% - 0.5%

 

 

 

 

 

 

 

Putback amount per projected total collateral loss (d)

 

0% - 11%

 

0% - 11%

CMBS

 

 

96,724

 

Discounted cash flow

 

Yield (b)

 

0% - 278.0%

 

0% - 435.8%

 

 

 

 

 

 

 

Duration (c)

 

0 - 9.8 years

 

0 - 18.5 years

Domestic servicing rights

 

 

95,492

 

Discounted cash flow

 

Debt yield (a)

 

8.25%

 

8.25%

 

 

 

 

 

 

 

Discount rate (b)

 

15%

 

15%

 

 

 

 

 

 

 

Control migration (b)

 

0% - 80%

 

0% - 80%

VIE assets

 

 

85,115,662

 

Discounted cash flow

 

Yield (b)

 

0% - 880.5%

 

0% - 920.2%

 

 

 

 

 

 

 

Duration (c)

 

0 - 15.1 years

 

0 - 17.5 years

VIE liabilities

 

 

3,038,534

 

Discounted cash flow

 

Yield (b)

 

0% - 880.5%

 

0% - 920.2%

 

 

 

 

 

 

 

Duration (c)

 

0 - 15.1 years

 

0 - 17.5 years


(1)

The ranges of significant unobservable inputs are represented in percentages and years.

 

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

 

(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 (lower or higher) fair value measurement depending on the structural features of the security in question.

 

(d)

Any delay in the putback recovery date leads to a decrease in fair value, for the majority of securities in our RMBS portfolio.

 

(e)

71% and 76% of the portfolio falls within a range of 45%-80% as of March 31, 2016 and December 31, 2015, respectively.

 

45


 

 

20.  Income Taxes

 

Certain of our 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 commercial mortgage loans, and investing in entities which engage in real estate related operations. The majority of our TRSs are held within the Investing and Servicing Segment.  As of March 31, 2016 and December 31, 2015, approximately $629.9 million and $858.5 million, respectively, of the Investing and Servicing Segment’s assets, including $61.7 million and $185.6 million in cash, respectively, 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 determined using our statutory federal tax rate to our reported income tax provision for the three months ended March 31, 2016 and 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2016

 

2015

 

Federal statutory tax rate

    

$

9,499

  

35.0

$

47,856

  

35.0

REIT and other non-taxable income

 

 

(8,964)

 

(33.0)

 

(34,972)

 

(25.6)

State income taxes

 

 

(95)

 

(0.4)

 

2,001

 

1.5

Federal benefit of state tax deduction

 

 

33

 

0.1

 

(700)

 

(0.5)

Valuation allowance

 

 

 —

 

 —

 

1,255

 

0.9

Other

 

 

(379)

 

(1.4)

 

511

 

0.4

Effective tax rate

 

$

94

  

0.3

$

15,951

  

11.7

 

 

 

46


 

21. Commitments and Contingencies

 

As of March 31, 2016, we had future funding commitments on 50 loans totaling $1.4 billion, of which we expect to fund $1.2 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. 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.

 

In the ordinary course of business, we provide various forms of guarantees.  In limited instances, specifically involving construction loans, the Company has guaranteed the future funding obligations of certain third party lenders in the event that such third parties fail to fund their proportionate share of the obligation in a timely manner.  We are currently unaware of any circumstances which would require us to make payments under any of these guarantees. 

 

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 condensed consolidated financial statements.

 

22.  Segment Data

 

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 VIEs under ASC 810. The segment information within this note is reported on that basis. 

 

Effective April 1, 2015, upon our Ireland Portfolio acquisition discussed in Note 3, we established a third business segment, the Property Segment, and transferred our existing equity method investment in four regional shopping malls (the “Retail Fund”) from our Lending Segment to our Property Segment. We have retrospectively reclassified prior periods to conform to these changes in presentation.

 

 

47


 

The table below presents our results of operations for the three months ended March 31, 2016 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

    

Investing

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

and Servicing

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

  

$

114,658

  

$

2,874

  

$

 —

  

$

 —

  

$

117,532

  

$

 —

  

$

117,532

Interest income from investment securities

 

 

9,628

  

 

47,626

 

 

 —

 

 

 —

 

 

57,254

 

 

(37,851)

 

 

19,403

Servicing fees

 

 

159

  

 

36,218

 

 

 —

 

 

 —

 

 

36,377

 

 

(11,686)

 

 

24,691

Rental income

 

 

 —

 

 

6,475

 

 

26,202

 

 

 —

 

 

32,677

 

 

 —

 

 

32,677

Other revenues

 

 

23

 

 

1,342

 

 

6

 

 

 —

 

 

1,371

 

 

(181)

 

 

1,190

Total revenues 

 

 

124,468

 

 

94,535

 

 

26,208

 

 

 —

 

 

245,211

 

 

(49,718)

 

 

195,493

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

375

 

 

18

 

 

 —

 

 

24,528

 

 

24,921

 

 

42

 

 

24,963

Interest expense

 

 

22,335

 

 

3,238

 

 

4,949

 

 

25,998

 

 

56,520

 

 

 —

 

 

56,520

General and administrative

 

 

3,922

 

 

25,294

 

 

555

 

 

2,850

 

 

32,621

 

 

177

 

 

32,798

Acquisition and investment pursuit costs

 

 

338

 

 

355

 

 

592

 

 

 —

 

 

1,285

 

 

 —

 

 

1,285

Costs of rental operations

 

 

 —

 

 

3,062

 

 

9,593

 

 

 —

 

 

12,655

 

 

 —

 

 

12,655

Depreciation and amortization

 

 

 —

 

 

3,051

 

 

15,709

 

 

 —

 

 

18,760

 

 

 —

 

 

18,760

Loan loss allowance, net

 

 

(761)

 

 

 —

 

 

 —

 

 

 —

 

 

(761)

 

 

 —

 

 

(761)

Other expense

 

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

100

 

 

 —

 

 

100

Total costs and expenses 

 

 

26,209

 

 

35,118

 

 

31,398

 

 

53,376

 

 

146,101

 

 

219

 

 

146,320

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

 

 

98,259

 

 

59,417

 

 

(5,190)

 

 

(53,376)

 

 

99,110

 

 

(49,937)

 

 

49,173

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,167)

 

 

(4,167)

Change in fair value of servicing rights

 

 

 —

 

 

(8,670)

 

 

 —

 

 

 —

 

 

(8,670)

 

 

1,931

 

 

(6,739)

Change in fair value of investment securities, net

 

 

(214)

 

 

(51,528)

 

 

 —

 

 

 —

 

 

(51,742)

 

 

52,495

 

 

753

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

 

 

 —

 

 

6,891

 

 

 —

 

 

 —

 

 

6,891

 

 

 —

 

 

6,891

Earnings from unconsolidated entities

 

 

468

 

 

1,377

 

 

2,429

 

 

 —

 

 

4,274

 

 

(209)

 

 

4,065

Gain on sale of investments and other assets, net

 

 

245

 

 

 —

 

 

 —

 

 

 —

 

 

245

 

 

 —

 

 

245

Loss on derivative financial instruments, net

 

 

(3,026)

 

 

(11,245)

 

 

(10,447)

 

 

 —

 

 

(24,718)

 

 

 —

 

 

(24,718)

Foreign currency (loss) gain, net

 

 

(1,822)

 

 

1,460

 

 

(16)

 

 

 —

 

 

(378)

 

 

 —

 

 

(378)

Other income, net

 

 

 —

 

 

43

 

 

422

 

 

1,550

 

 

2,015

 

 

 —

 

 

2,015

Total other income (loss) 

 

 

(4,349)

 

 

(61,672)

 

 

(7,612)

 

 

1,550

 

 

(72,083)

 

 

50,050

 

 

(22,033)

Income (loss) before income taxes 

 

 

93,910

 

 

(2,255)

 

 

(12,802)

 

 

(51,826)

 

 

27,027

 

 

113

 

 

27,140

Income tax provision

 

 

(75)

 

 

(19)

 

 

 —

 

 

 —

 

 

(94)

 

 

 —

 

 

(94)

Net income (loss) 

 

 

93,835

 

 

(2,274)

 

 

(12,802)

 

 

(51,826)

 

 

26,933

 

 

113

 

 

27,046

Net (income) loss attributable to non-controlling interests

 

 

(350)

 

 

74

 

 

 —

 

 

 —

 

 

(276)

 

 

(113)

 

 

(389)

Net income (loss) attributable to Starwood Property Trust, Inc.  

 

$

93,485

 

$

(2,200)

 

$

(12,802)

 

$

(51,826)

 

$

26,657

 

$

 —

 

$

26,657

 

48


 

The table below presents our results of operations for the three months ended March 31, 2015 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

    

Investing

    

 

 

 

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

and Servicing

 

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

 

$

113,472

 

$

4,957

 

$

 —

 

$

 —

 

$

118,429

 

$

 —

 

$

118,429

 

 

Interest income from investment securities

 

 

22,296

 

 

24,696

 

 

 —

 

 

 —

 

 

46,992

 

 

(19,248)

 

 

27,744

 

 

Servicing fees

 

 

84

 

 

50,948

 

 

 —

 

 

 —

 

 

51,032

 

 

(22,775)

 

 

28,257

 

 

Rental income

 

 

 —

 

 

2,672

 

 

 —

 

 

 —

 

 

2,672

 

 

 —

 

 

2,672

 

 

Other revenues

 

 

79

 

 

1,930

 

 

 —

 

 

 —

 

 

2,009

 

 

(262)

 

 

1,747

 

 

Total revenues 

 

 

135,931

 

 

85,203

 

 

 —

 

 

 —

 

 

221,134

 

 

(42,285)

 

 

178,849

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

388

 

 

18

 

 

 —

 

 

27,512

 

 

27,918

 

 

50

 

 

27,968

 

 

Interest expense

 

 

21,523

 

 

2,119

 

 

 —

 

 

26,892

 

 

50,534

 

 

 —

 

 

50,534

 

 

General and administrative

 

 

4,858

 

 

29,189

 

 

2

 

 

1,029

 

 

35,078

 

 

186

 

 

35,264

 

 

Acquisition and investment pursuit costs

 

 

773

 

 

213

 

 

 —

 

 

200

 

 

1,186

 

 

 —

 

 

1,186

 

 

Costs of rental operations

 

 

 —

 

 

1,698

 

 

 —

 

 

 —

 

 

1,698

 

 

 —

 

 

1,698

 

 

Depreciation and amortization

 

 

 —

 

 

4,085

 

 

 —

 

 

 —

 

 

4,085

 

 

 —

 

 

4,085

 

 

Loan loss allowance, net

 

 

317

 

 

 —

 

 

 —

 

 

 —

 

 

317

 

 

 —

 

 

317

 

 

Other expense

 

 

 —

 

 

375

 

 

 —

 

 

 —

 

 

375

 

 

 —

 

 

375

 

 

Total costs and expenses 

 

 

27,859

 

 

37,697

 

 

2

 

 

55,633

 

 

121,191

 

 

236

 

 

121,427

 

 

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

 

 

108,072

 

 

47,506

 

 

(2)

 

 

(55,633)

 

 

99,943

 

 

(42,521)

 

 

57,422

 

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

47,861

 

 

47,861

 

 

Change in fair value of servicing rights

 

 

 —

 

 

(4,875)

 

 

 —

 

 

 —

 

 

(4,875)

 

 

3,333

 

 

(1,542)

 

 

Change in fair value of investment securities, net

 

 

(339)

 

 

8,313

 

 

 —

 

 

 —

 

 

7,974

 

 

(8,473)

 

 

(499)

 

 

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

 

 

 —

 

 

21,131

 

 

 —

 

 

 —

 

 

21,131

 

 

 —

 

 

21,131

 

 

Earnings from unconsolidated entities

 

 

855

 

 

2,724

 

 

2,641

 

 

 —

 

 

6,220

 

 

(130)

 

 

6,090

 

 

Gain on sale of investments and other assets, net

 

 

98

 

 

17,100

 

 

 —

 

 

 —

 

 

17,198

 

 

 —

 

 

17,198

 

 

Gain (loss) on derivative financial instruments, net

 

 

32,863

 

 

(8,007)

 

 

(233)

 

 

 —

 

 

24,623

 

 

 —

 

 

24,623

 

 

Foreign currency (loss) gain, net

 

 

(29,336)

 

 

(1,171)

 

 

200

 

 

 —

 

 

(30,307)

 

 

 —

 

 

(30,307)

 

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(5,292)

 

 

(5,292)

 

 

 —

 

 

(5,292)

 

 

Other income, net

 

 

 —

 

 

31

 

 

 —

 

 

14

 

 

45

 

 

 —

 

 

45

 

 

Total other income (loss) 

 

 

4,141

 

 

35,246

 

 

2,608

 

 

(5,278)

 

 

36,717

 

 

42,591

 

 

79,308

 

 

Income (loss) before income taxes 

 

 

112,213

 

 

82,752

 

 

2,606

 

 

(60,911)

 

 

136,660

 

 

70

 

 

136,730

 

 

Income tax benefit (provision)

 

 

30

 

 

(15,981)

 

 

 —

 

 

 —

 

 

(15,951)

 

 

 —

 

 

(15,951)

 

 

Net income (loss) 

 

 

112,243

 

 

66,771

 

 

2,606

 

 

(60,911)

 

 

120,709

 

 

70

 

 

120,779

 

 

Net income attributable to non-controlling interests

 

 

(346)

 

 

 —

 

 

 —

 

 

 —

 

 

(346)

 

 

(70)

 

 

(416)

 

 

Net income (loss) attributable to Starwood Property Trust, Inc.  

 

$

111,897

 

$

66,771

 

$

2,606

 

$

(60,911)

 

$

120,363

 

$

 —

 

$

120,363

 

 

 

 

 

 

 

49


 

The table below presents our condensed consolidated balance sheet as of March 31, 2016 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

    

Investing

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

and Servicing

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,942

 

$

70,684

 

$

15,486

 

$

144,062

 

$

334,174

 

$

1,045

 

$

335,219

Restricted cash

 

 

31,474

 

 

11,710

 

 

5,191

 

 

 —

 

 

48,375

 

 

 —

 

 

48,375

Loans held-for-investment, net

 

 

6,169,937

 

 

17,717

 

 

 —

 

 

 —

 

 

6,187,654

 

 

 —

 

 

6,187,654

Loans held-for-sale

 

 

 —

 

 

154,225

 

 

 —

 

 

 —

 

 

154,225

 

 

 —

 

 

154,225

Loans transferred as secured borrowings

 

 

88,512

 

 

 —

 

 

 —

 

 

 —

 

 

88,512

 

 

 —

 

 

88,512

Investment securities

 

 

552,640

 

 

1,012,618

 

 

 —

 

 

 —

 

 

1,565,258

 

 

(915,894)

 

 

649,364

Properties, net

 

 

 —

 

 

172,289

 

 

982,686

 

 

 —

 

 

1,154,975

 

 

 —

 

 

1,154,975

Intangible assets

 

 

 —

 

 

147,495

 

 

60,346

 

 

 —

 

 

207,841

 

 

(27,365)

 

 

180,476

Investment in unconsolidated entities

 

 

30,311

 

 

52,463

 

 

121,297

 

 

 —

 

 

204,071

 

 

(7,434)

 

 

196,637

Goodwill

 

 

 —

 

 

140,437

 

 

 —

 

 

 —

 

 

140,437

 

 

 —

 

 

140,437

Derivative assets

 

 

33,237

 

 

2,911

 

 

790

 

 

 —

 

 

36,938

 

 

 —

 

 

36,938

Accrued interest receivable

 

 

35,451

 

 

469

 

 

 —

 

 

 —

 

 

35,920

 

 

52

 

 

35,972

Other assets

 

 

14,640

 

 

70,562

 

 

27,132

 

 

1,737

 

 

114,071

 

 

(2,211)

 

 

111,860

VIE assets, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

85,115,662

 

 

85,115,662

Total Assets

 

$

7,060,144

 

$

1,853,580

 

$

1,212,928

 

$

145,799

 

$

10,272,451

 

$

84,163,855

 

$

94,436,306

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

28,501

 

$

51,774

 

$

42,329

 

$

15,962

 

$

138,566

 

$

720

 

$

139,286

Related-party payable

 

 

 —

 

 

689

 

 

 —

 

 

23,468

 

 

24,157

 

 

 —

 

 

24,157

Dividends payable

 

 

 —

 

 

 —

 

 

 —

 

 

114,839

 

 

114,839

 

 

 —

 

 

114,839

Derivative liabilities

 

 

12,551

 

 

2,106

 

 

1,545

 

 

 —

 

 

16,202

 

 

 —

 

 

16,202

Secured financing agreements, net

 

 

2,723,567

 

 

397,884

 

 

712,782

 

 

646,727

 

 

4,480,960

 

 

 —

 

 

4,480,960

Convertible senior notes, net

 

 

 —

 

 

 —

 

 

 —

 

 

1,329,072

 

 

1,329,072

 

 

 —

 

 

1,329,072

Secured borrowings on transferred loans

 

 

89,905

 

 

 —

 

 

 —

 

 

 —

 

 

89,905

 

 

 —

 

 

89,905

VIE liabilities, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

84,151,022

 

 

84,151,022

Total Liabilities

 

 

2,854,524

 

 

452,453

 

 

756,656

 

 

2,130,068

 

 

6,193,701

 

 

84,151,742

 

 

90,345,443

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

2,422

 

 

2,422

 

 

 —

 

 

2,422

Additional paid-in capital

 

 

2,276,386

 

 

1,173,852

 

 

456,658

 

 

304,008

 

 

4,210,904

 

 

 —

 

 

4,210,904

Treasury stock

 

 

 —

 

 

 —

 

 

 —

 

 

(92,104)

 

 

(92,104)

 

 

 —

 

 

(92,104)

Accumulated other comprehensive income (loss)

 

 

33,569

 

 

(4,395)

 

 

4,283

 

 

 —

 

 

33,457

 

 

 —

 

 

33,457

Retained earnings (accumulated deficit)

 

 

1,884,190

 

 

218,873

 

 

(4,669)

 

 

(2,198,595)

 

 

(100,201)

 

 

 —

 

 

(100,201)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,194,145

 

 

1,388,330

 

 

456,272

 

 

(1,984,269)

 

 

4,054,478

 

 

 —

 

 

4,054,478

Non-controlling interests in consolidated subsidiaries

 

 

11,475

 

 

12,797

 

 

 —

 

 

 —

 

 

24,272

 

 

12,113

 

 

36,385

Total Equity

 

 

4,205,620

 

 

1,401,127

 

 

456,272

 

 

(1,984,269)

 

 

4,078,750

 

 

12,113

 

 

4,090,863

Total Liabilities and Equity

 

$

7,060,144

 

$

1,853,580

 

$

1,212,928

 

$

145,799

 

$

10,272,451

 

$

84,163,855

 

$

94,436,306

 

50


 

The table below presents our condensed consolidated balance sheet as of December 31, 2015 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

 

    

 

 

    

Investing

    

 

 

 

    

Lending

    

and Servicing

    

Property

 

 

    

 

 

    

and Servicing

    

 

 

 

    

Segment

    

Segment

    

Segment

 

Corporate

    

Subtotal

    

VIEs

    

Total

Assets:

    

 

 

    

 

 

    

 

 

 

 

 

    

 

 

    

 

 

    

 

 

Cash and cash equivalents

    

$

83,836

    

$

62,649

    

$

2,944

    

$

218,408

    

$

367,837

    

$

978

    

$

368,815

Restricted cash

 

 

9,775

 

 

8,826

 

 

4,468

 

 

 —

 

 

23,069

 

 

 —

 

 

23,069

Loans held-for-investment, net

 

 

5,973,079

 

 

 —

 

 

 —

 

 

 —

 

 

5,973,079

 

 

 —

 

 

5,973,079

Loans held-for-sale

 

 

 —

 

 

203,865

 

 

 —

 

 

 —

 

 

203,865

 

 

 —

 

 

203,865

Loans transferred as secured borrowings

 

 

86,573

 

 

 —

 

 

 —

 

 

 —

 

 

86,573

 

 

 —

 

 

86,573

Investment securities

 

 

511,966

 

 

1,038,200

 

 

 —

 

 

 —

 

 

1,550,166

 

 

(825,219)

 

 

724,947

Properties, net

 

 

 —

 

 

150,497

 

 

768,728

 

 

 —

 

 

919,225

 

 

 —

 

 

919,225

Intangible assets

 

 

 —

 

 

152,278

 

 

61,121

 

 

 —

 

 

213,399

 

 

(11,829)

 

 

201,570

Investment in unconsolidated entities

 

 

30,827

 

 

53,145

 

 

122,454

 

 

 —

 

 

206,426

 

 

(7,225)

 

 

199,201

Goodwill

 

 

 —

 

 

140,437

 

 

 —

 

 

 —

 

 

140,437

 

 

 —

 

 

140,437

Derivative assets

 

 

33,412

 

 

2,087

 

 

9,592

 

 

 —

 

 

45,091

 

 

 —

 

 

45,091

Accrued interest receivable

 

 

34,028

 

 

286

 

 

 —

 

 

 —

 

 

34,314

 

 

 —

 

 

34,314

Other assets

 

 

7,938

 

 

71,505

 

 

23,657

 

 

1,436

 

 

104,536

 

 

(2,057)

 

 

102,479

VIE assets, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

76,675,689

 

 

76,675,689

Total Assets

 

$

6,771,434

 

$

1,883,775

 

$

992,964

 

$

219,844

 

$

9,868,017

 

$

75,830,337

 

$

85,698,354

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

18,822

 

$

90,399

 

$

25,427

 

$

21,468

 

$

156,116

 

$

689

 

$

156,805

Related-party payable

 

 

 —

 

 

423

 

 

 —

 

 

40,532

 

 

40,955

 

 

 —

 

 

40,955

Dividends payable

 

 

 —

 

 

 —

 

 

 —

 

 

114,947

 

 

114,947

 

 

 —

 

 

114,947

Derivative liabilities

 

 

5,190

 

 

6

 

 

 —

 

 

 —

 

 

5,196

 

 

 —

 

 

5,196

Secured financing agreements, net

 

 

2,341,897

 

 

422,260

 

 

568,738

 

 

647,804

 

 

3,980,699

 

 

 —

 

 

3,980,699

Convertible senior notes, net

 

 

 —

 

 

 —

 

 

 —

 

 

1,323,795

 

 

1,323,795

 

 

 —

 

 

1,323,795

Secured borrowings on transferred loans

 

 

88,000

 

 

 —

 

 

 —

 

 

 —

 

 

88,000

 

 

 —

 

 

88,000

VIE liabilities, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

75,817,014

 

 

75,817,014

Total Liabilities

 

 

2,453,909

 

 

513,088

 

 

594,165

 

 

2,148,546

 

 

5,709,708

 

 

75,817,703

 

 

81,527,411

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

2,410

 

 

2,410

 

 

 —

 

 

2,410

Additional paid-in capital

 

 

2,477,987

 

 

1,146,926

 

 

394,465

 

 

173,466

 

 

4,192,844

 

 

 —

 

 

4,192,844

Treasury stock

 

 

 —

 

 

 —

 

 

 —

 

 

(72,381)

 

 

(72,381)

 

 

 —

 

 

(72,381)

Accumulated other comprehensive income (loss)

 

 

37,242

 

 

(3,714)

 

 

(3,799)

 

 

 —

 

 

29,729

 

 

 —

 

 

29,729

Retained earnings (accumulated deficit)

 

 

1,790,705

 

 

221,073

 

 

8,133

 

 

(2,032,197)

 

 

(12,286)

 

 

 —

 

 

(12,286)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,305,934

 

 

1,364,285

 

 

398,799

 

 

(1,928,702)

 

 

4,140,316

 

 

 —

 

 

4,140,316

Non-controlling interests in consolidated subsidiaries

 

 

11,591

 

 

6,402

 

 

 —

 

 

 —

 

 

17,993

 

 

12,634

 

 

30,627

Total Equity

 

 

4,317,525

 

 

1,370,687

 

 

398,799

 

 

(1,928,702)

 

 

4,158,309

 

 

12,634

 

 

4,170,943

Total Liabilities and Equity

 

$

6,771,434

 

$

1,883,775

 

$

992,964

 

$

219,844

 

$

9,868,017

 

$

75,830,337

 

$

85,698,354

 

 

 

 

 

51


 

23. Subsequent Events

 

Our significant events subsequent to March 31, 2016 were as follows:

 

Woodstar Portfolio Acquisitions

 

In April 2016, we acquired the final two properties in the Woodstar Portfolio, comprised of 628 units, which were previously under contract for an aggregate gross acquisition price of $39.4 million.  We assumed government sponsored debt of $2.5 million and other third party debt of $18.6 million at acquisition.

 

Dividend Declaration

 

On May 9, 2016, our board of directors declared a dividend of $0.48 per share for the second quarter of 2016, which is payable on July 15, 2016 to common stockholders of record as of June 30, 2016.

 

52


 

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, 2015 (the “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 (“IPO”). We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate investments in both the U.S. and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

 

We have three reportable business segments as of March 31, 2016:

 

·

Real estate lending (the “Lending Segment”)— engages primarily in originating, acquiring, financing and managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS, RMBS and other real estate and real estate-related debt investments in both the U.S. and Europe that are held-for-investment.

 

·

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) servicing businesses in both the U.S. and Europe that manage and work out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions, and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

 

·

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

 

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.

53


 

 

Developments During the First Quarter of 2016

 

·

The Lending Segment originated or acquired the following loans during the quarter:

 

o

$162.0 million first mortgage and mezzanine loan for the acquisition and renovation of a 10-building office and warehouse complex located in Brooklyn, New York, of which the Company funded $80.0 million.

 

o

$105.0 million first mortgage secured by two Class A multifamily properties located in Orlando, Florida, which was fully funded upon acquisition.

 

o

$65.0 million first mortgage and mezzanine loan for the refinancing of a data center located in Orlando, Florida, of which the Company funded $60.0 million.

 

o

$54.2 million first mortgage and mezzanine loan for the acquisition and renovation of a 491-room hotel located in Cincinnati, Ohio, of which the Company funded $46.4 million.

 

·

Acquired 12 of the 32 affordable housing communities which comprise our “Woodstar Portfolio.” These 12 properties include 3,082 units, total assets of $227.4 million and assumed liabilities of $147.5 million, which includes federal, state and county sponsored financing.

 

·

Funded $185.6 million of previously originated loan commitments.

 

·

Received proceeds of $290.6 million from maturities, sales and principal repayments on loans.

 

·

Purchased $46.6 million and $41.5 million of CMBS and RMBS, respectively.

 

·

Originated new conduit loans of $200.6 million and received proceeds of $257.0 million from sales of conduit loans.

 

·

Acquired commercial real estate from CMBS trusts for a gross purchase price of $24.9 million.

 

·

Repurchased 1,052,889 shares of common stock at a total cost of $19.7 million.

 

Subsequent Events

 

Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to March 31, 2016.

 

Results of Operations

 

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 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 VIEs, refer to the Non-GAAP Financial Measures section herein.

 

54


 

The following table compares our summarized results of operations for the three months ended March 31, 2016 and 2015 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

    

2016

    

2015

    

$ Change

Revenues:

 

 

 

 

 

 

 

 

 

Lending Segment

 

$

124,468

 

$

135,931

 

$

(11,463)

Investing and Servicing Segment

 

 

94,535

 

 

85,203

 

 

9,332

Property Segment

 

 

26,208

 

 

 —

 

 

26,208

Investing and Servicing VIEs

 

 

(49,718)

 

 

(42,285)

 

 

(7,433)

 

 

 

195,493

 

 

178,849

 

 

16,644

Costs and expenses (1):

 

 

 

 

 

 

 

 

 

Lending Segment

 

 

26,209

 

 

27,859

 

 

(1,650)

Investing and Servicing Segment

 

 

35,118

 

 

37,697

 

 

(2,579)

Property Segment

 

 

31,398

 

 

2

 

 

31,396

Corporate

 

 

53,376

 

 

55,633

 

 

(2,257)

Investing and Servicing VIEs

 

 

219

 

 

236

 

 

(17)

 

 

 

146,320

 

 

121,427

 

 

24,893

Other income (loss) (1):

 

 

 

 

 

 

 

 

 

Lending Segment

 

 

(4,349)

 

 

4,141

 

 

(8,490)

Investing and Servicing Segment

 

 

(61,672)

 

 

35,246

 

 

(96,918)

Property Segment

 

 

(7,612)

 

 

2,608

 

 

(10,220)

Corporate

 

 

1,550

 

 

(5,278)

 

 

6,828

Investing and Servicing VIEs

 

 

50,050

 

 

42,591

 

 

7,459

 

 

 

(22,033)

 

 

79,308

 

 

(101,341)

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

Lending Segment

 

 

93,910

 

 

112,213

 

 

(18,303)

Investing and Servicing Segment

 

 

(2,255)

 

 

82,752

 

 

(85,007)

Property Segment

 

 

(12,802)

 

 

2,606

 

 

(15,408)

Corporate

 

 

(51,826)

 

 

(60,911)

 

 

9,085

Investing and Servicing VIEs

 

 

113

 

 

70

 

 

43

 

 

 

27,140

 

 

136,730

 

 

(109,590)

Income tax provision

 

 

(94)

 

 

(15,951)

 

 

15,857

Net income attributable to non-controlling interests

 

 

(389)

 

 

(416)

 

 

27

Net income attributable to Starwood Property Trust, Inc.

 

$

26,657

 

$

120,363

 

$

(93,706)

(1)

Effective April 1, 2015, we established a third business segment, the Property Segment, and transferred our existing equity method investment in four regional shopping malls (the “Retail Fund”) and its associated income from our Lending Segment to our Property Segment. We have retrospectively reclassified prior periods to conform to these changes in presentation.

 

Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015

 

Lending Segment

 

Revenues

 

For the three months ended March 31, 2016, revenues of our Lending Segment decreased $11.4 million to $124.5 million, compared to $135.9 million for the three months ended March 31, 2015. This decrease was primarily due to (i) a $12.6 million decrease in interest income from investment securities principally due to maturities after March 31, 2015 of two preferred equity interests we held in companies that own commercial real estate, and the absence of $5.4 million of income realized upon the collection of a RMBS in the first quarter of 2015, partially offset by (ii) a $1.2

55


 

million increase in interest income from loans, which reflects a $125.7 million net increase in loan investments of our Lending Segment between March 31, 2015 and 2016.

 

Costs and Expenses

 

For the three months ended March 31, 2016, costs and expenses of our Lending Segment decreased $1.7 million to $26.2 million, compared to $27.9 million for the three months ended March 31, 2015. This decrease was primarily due to a $1.1 million decrease in our loan loss allowance and a $0.4 million decrease in investment pursuit costs.  A $0.9 million decrease in general and administrative (“G&A”) expenses primarily due to lower compensation costs was offset by a $0.8 million increase in interest expense associated with the various secured financing facilities used to fund the growth of our investment portfolio.    

 

Net Interest Income (amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

 

 

    

2016

    

2015

    

Change

Interest income from loans

 

$

114,658

 

$

113,472

 

$

1,186

Interest income from investment securities

 

 

9,628

 

 

22,296

 

 

(12,668)

Interest expense

 

 

(22,335)

 

 

(21,523)

 

 

(812)

Net interest income

 

$

101,951

 

$

114,245

 

$

(12,294)

 

For the three months ended March 31, 2016, net interest income of our Lending Segment decreased $12.3 million to $101.9 million compared to $114.2 million for the three months ended March 31, 2015.  This decrease primarily reflects the $12.6 million decrease in interest income from investment securities explained in the Revenues discussion above. 

 

During the three months ended March 31, 2016, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were 7.4% and 10.0%, respectively. During the three months ended March 31, 2015, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were 7.7% and 10.4%, respectively. The slight decrease in the weighted average unlevered and levered yields is primarily due to a gradual decline of interest rate spreads over the last twelve months.

 

During the three months ended March 31, 2016 and 2015, the Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.7% and 3.5%, respectively. This increase in borrowing rates primarily reflects increases in certain debt fees. 

 

Other Income (Loss)

 

For the three months ended March 31, 2016, other income (loss) of our Lending Segment decreased $8.5 million to a loss of $4.4 million, compared to income of $4.1 million for the three months ended March 31, 2015. The decrease was primarily due to an unfavorable swing of $35.9 million in gain (loss) on derivatives partially offset by a $27.5 million decrease in foreign currency loss.  The unfavorable swing in gain (loss) on derivatives reflects a $33.4 million decrease in the gain on foreign currency hedges and a $2.5 million increased loss on interest rate swaps.  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 CMBS investments.  The gains on those hedges reflect the overall strengthening of the U.S. dollar against the pound sterling (“GBP”).  The interest rate swaps are used primarily to fix our interest rate payments on variable rate borrowings.  The decrease in gain on foreign currency hedges is greater than the offsetting decrease in foreign currency loss mainly because the portion of unrealized foreign currency loss associated with an investment security held in 2015 was reported in accumulated other comprehensive income (“AOCI”) rather than earnings, in accordance with GAAP, whereas the full change in fair value of the related currency hedge was reported in earnings since it was not a designated hedge. 

 

56


 

Investing and Servicing Segment and VIEs

 

Revenues

 

For the three months ended March 31, 2016, revenues of our Investing and Servicing Segment increased $1.9 million to $44.8 million after consolidated VIE eliminations of $49.7 million, compared to $42.9 million after consolidated VIE eliminations of $42.3 million for the three months ended March 31, 2015. The VIE eliminations are merely a function of the number of CMBS trusts consolidated in any given period, and as such, are not a meaningful indicator of the operating results for this segment.  The increase in revenues in the first quarter of 2016 was primarily due to increases of $4.3 million in interest income from CMBS investments and $3.8 million in rental income on our expanded REO Portfolio (see Note 3 to the Condensed Consolidated Financial Statements), partially offset by decreases of $3.6 million in servicing fees and $2.1 million in interest income on loans held-for-sale.  The $4.3 million increase in CMBS interest income reflects an $18.6 million increase in VIE eliminations related to the CMBS trusts we consolidate.  Excluding the effect of these eliminations, CMBS interest income increased by $22.9 million, reflecting a $205.7 million net increase in this segment’s CMBS investments between March 31, 2015 and 2016.

 

Costs and Expenses

 

For the three months ended March 31, 2016, costs and expenses of our Investing and Servicing Segment decreased $2.6 million to $35.3 million, compared to $37.9 million for the three months ended March 31, 2015, inclusive of VIE eliminations which were nominal for both periods. The decrease in costs and expenses was primarily due to lower incentive compensation, partially offset by an increase in interest expense on secured financings for CMBS and the REO Portfolio.

 

Other Income (Loss)

 

For the three months ended March 31, 2016, other income (loss) of our Investing and Servicing Segment decreased $89.4 million to a loss of $11.6 million including additive net VIE eliminations of $50.0 million, from income of $77.8 million including additive net VIE eliminations of $42.6 million for the three months ended March 31, 2015.  The decrease in other income (loss) in the first quarter of 2016 compared to the first quarter of 2015 was primarily due to a decrease of $52.0 million in the change in value of net assets related to consolidated VIEs, the absence of a $17.1 million gain on sale of a commercial real estate asset realized in the first quarter of 2015 and a $14.2 million lesser increase in fair value of loans held-for-sale. The change in net assets related to consolidated VIEs reflects amounts associated with the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of the operating results for this segment.  Before VIE eliminations, there was a decrease in fair value of CMBS securities of $51.5 million and an increase of $8.3 million in the three months ended March 31, 2016 and 2015, respectively.

 

Income Tax Provision

 

Historically, our consolidated income tax provision principally relates to the taxable nature of the Investing and Servicing Segment’s loan servicing and loan conduit businesses which are housed in TRSs.  Our tax provision for the three months ended March 31, 2016, as well as the overall effective tax rate, is lower than for the three months ended March 31, 2015 primarily due to a decrease in the taxable income of our TRSs.

 

Property Segment

 

During the three months ended March 31, 2015, there was no significant activity in the Property Segment except for equity in earnings of the Retail Fund. Therefore a comparison of results of this segment for the three months ended March 31, 2015 to the three months ended March 31, 2016 is not meaningful.

 

57


 

Revenues

 

For the three months ended March 31, 2016, revenues of our Property Segment of $26.2 million consisted of rental income of $18.2 million from our Woodstar Portfolio and $8.0 million from our Ireland Portfolio, both of which are described in Note 3 to the Condensed Consolidated Financial Statements.

 

Costs and Expenses

 

For the three months ended March 31, 2016, costs and expenses of our Property Segment of $31.4 million consisted principally of $15.7 million of depreciation and amortization, $9.6 million of other rental related costs, $4.9 million of interest expense on the secured financing for the Woodstar and Ireland Portfolios and $0.6 million of acquisition and investment pursuit costs.

 

Other Income (Loss)

 

For the three months ended March 31, 2016, other loss of our Property Segment of $7.6 million consisted primarily of a $10.0 million loss on foreign currency contracts that economically hedge our Euro currency exposure with respect to the Ireland Portfolio, partially offset by $2.4 million of equity in earnings from the Retail Fund.

 

Corporate

 

Costs and Expenses

 

For the three months ended March 31, 2016, corporate expenses decreased $2.2 million to $53.4 million, compared to $55.6 million for the three months ended March 31, 2015. The decrease was primarily due to a $3.0 million decrease in management fees. 

 

Other Income (Loss)

 

For the three months ended March 31, 2016, corporate other income (loss) increased $6.8 million to income of $1.5 million, compared to a loss of $5.3 million for the three months ended March 31, 2015.  Corporate other income of $1.5 million for the three months ended March 31, 2016 represents a reimbursement received related to a partnership guarantee arrangement.  Corporate other loss of $5.3 million for the three months ended March 31, 2015 represents a loss on the repurchase of $104.1 million of convertible senior notes due 2019.

 

Non-GAAP Financial Measures

 

Core Earnings is a non-GAAP financial measure. We calculate Core 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)

losses on extinguishment of debt;

(v)

acquisition costs associated with successful acquisitions (effective July 1, 2015); and

(vi)

any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income.

58


 

We believe that Core Earnings provides an additional measure of our core operating performance by eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial results to those of other comparable REITs with fewer or no non-cash adjustments and comparison of our own operating results from period to period. Our management uses Core Earnings in this way, and also uses Core Earnings to compute the incentive fee due under our management agreement. The Company believes that its investors also use Core Earnings or a comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers, and as such, the Company believes that the disclosure of Core Earnings is useful to (and expected by) its investors.

 

However, the Company cautions that Core Earnings does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), or an indication of our cash flows from operating activities (determined in accordance with GAAP), a measure of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core Earnings may not be comparable to the Core Earnings reported by other REITs.

 

In assessing the appropriate weighted average diluted share count to apply to Core Earnings for purposes of determining Core Earnings per share (“EPS”), management considered the following attributes of our current GAAP diluted share methodology: (i) our unvested stock awards representing participating securities were determined to be anti-dilutive and were thus excluded from the denominator of the EPS calculation; and (ii) the portion of the convertible senior notes that are “in-the-money” (referred to as the “conversion spread value”), representing the value that would be delivered to investors in shares upon an assumed conversion, is included in the denominator.  Because compensation expense related to unvested stock awards is added back for Core Earnings purposes pursuant to the definition above, there is no dilution to Core Earnings resulting from the associated expense recognition.  As a result, for purposes of determining Core EPS, our GAAP EPS methodology was adjusted to include (instead of exclude) such unvested awards. Further, conversion of the convertible senior 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 Core Earnings, our GAAP EPS methodology was adjusted to exclude (instead of include) the conversion spread value in determining Core EPS until a conversion actually occurs. 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 Core EPS calculation (amounts in thousands):

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

March 31,

 

    

2016

    

2015

Diluted weighted average shares - GAAP

 

236,759

 

229,032

Add: Unvested stock awards

 

1,793

 

2,014

Less: Conversion spread value

 

 —

 

(5,353)

Diluted weighted average shares - Core

 

238,552

 

225,693

 

The definition of Core 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 Core Earnings to be calculated in a manner consistent with its definition and objective.  No adjustments to the definition of Core Earnings occurred during the three months ended March 31, 2016.

 

59


 

Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015

 

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended March 31, 2016, by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Total

Revenues

 

$

124,468

 

$

94,535

 

$

26,208

 

$

 —

 

$

245,211

Costs and expenses

 

 

(26,209)

 

 

(35,118)

 

 

(31,398)

 

 

(53,376)

 

 

(146,101)

Other income (loss)

 

 

(4,349)

 

 

(61,672)

 

 

(7,612)

 

 

1,550

 

 

(72,083)

Income (loss) before income taxes

 

 

93,910

 

 

(2,255)

 

 

(12,802)

 

 

(51,826)

 

 

27,027

Income tax provision

 

 

(75)

 

 

(19)

 

 

 —

 

 

 —

 

 

(94)

(Income) loss attributable to non-controlling interests

 

 

(350)

 

 

74

 

 

 —

 

 

 —

 

 

(276)

Net income (loss) attributable to Starwood Property Trust, Inc.

 

 

93,485

 

 

(2,200)

 

 

(12,802)

 

 

(51,826)

 

 

26,657

Add / (Deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

582

 

 

1,086

 

 

33

 

 

5,383

 

 

7,084

Management incentive fee

 

 

 —

 

 

 —

 

 

 —

 

 

4,599

 

 

4,599

Acquisition and investment pursuit costs

 

 

 —

 

 

589

 

 

558

 

 

 —

 

 

1,147

Depreciation and amortization

 

 

 —

 

 

2,206

 

 

15,720

 

 

 —

 

 

17,926

Loan loss allowance, net

 

 

(761)

 

 

 —

 

 

 —

 

 

 —

 

 

(761)

Interest income adjustment for securities

 

 

(261)

 

 

889

 

 

 —

 

 

 —

 

 

628

Other non-cash items

 

 

 —

 

 

 —

 

 

(1,608)

 

 

 —

 

 

(1,608)

Reversal of unrealized (gains) / losses on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 —

 

 

(6,891)

 

 

 —

 

 

 —

 

 

(6,891)

Securities

 

 

214

 

 

51,528

 

 

 —

 

 

 —

 

 

51,742

Derivatives

 

 

2,347

 

 

10,763

 

 

10,447

 

 

 —

 

 

23,557

Foreign currency

 

 

1,822

 

 

(1,460)

 

 

16

 

 

 —

 

 

378

Earnings from unconsolidated entities

 

 

(468)

 

 

(1,377)

 

 

(2,429)

 

 

 —

 

 

(4,274)

Recognition of realized gains / (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 —

 

 

4,792

 

 

 —

 

 

 —

 

 

4,792

Securities

 

 

 —

 

 

(3,323)

 

 

 —

 

 

 —

 

 

(3,323)

Derivatives

 

 

554

 

 

(6,712)

 

 

(70)

 

 

 —

 

 

(6,228)

Foreign currency

 

 

(67)

 

 

1,354

 

 

(15)

 

 

 —

 

 

1,272

Earnings from unconsolidated entities

 

 

1,072

 

 

1,125

 

 

 —

 

 

 —

 

 

2,197

Core Earnings (Loss)

 

$

98,519

 

$

52,369

 

$

9,850

 

$

(41,844)

 

$

118,894

Core Earnings (Loss) per Weighted Average Diluted Share

 

$

0.41

 

$

0.22

 

$

0.04

 

$

(0.17)

 

$

0.50

 

60


 

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended March 31, 2015, by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Total

Revenues

 

$

135,931

 

$

85,203

 

$

 —

 

$

 —

 

$

221,134

Costs and expenses (1)

 

 

(27,859)

 

 

(37,697)

 

 

(2)

 

 

(55,633)

 

 

(121,191)

Other income (1)

 

 

4,141

 

 

35,246

 

 

2,608

 

 

(5,278)

 

 

36,717

Income (loss) before income taxes

 

 

112,213

 

 

82,752

 

 

2,606

 

 

(60,911)

 

 

136,660

Income tax benefit (provision)

 

 

30

 

 

(15,981)

 

 

 —

 

 

 —

 

 

(15,951)

Income attributable to non-controlling interests

 

 

(346)

 

 

 —

 

 

 —

 

 

 —

 

 

(346)

Net income (loss) attributable to Starwood Property Trust, Inc.

 

 

111,897

 

 

66,771

 

 

2,606

 

 

(60,911)

 

 

120,363

Add / (Deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

177

 

 

263

 

 

 —

 

 

7,051

 

 

7,491

Management incentive fee

 

 

 —

 

 

 —

 

 

 —

 

 

6,679

 

 

6,679

Depreciation and amortization

 

 

 —

 

 

442

 

 

 —

 

 

 —

 

 

442

Loan loss allowance, net

 

 

317

 

 

 —

 

 

 —

 

 

 —

 

 

317

Interest income adjustment for securities

 

 

(63)

 

 

3,787

 

 

 —

 

 

 —

 

 

3,724

Other non-cash items

 

 

 —

 

 

(775)

 

 

 —

 

 

 —

 

 

(775)

Reversal of unrealized (gains) / losses on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 —

 

 

(21,131)

 

 

 —

 

 

 —

 

 

(21,131)

Securities

 

 

339

 

 

(8,313)

 

 

 —

 

 

 —

 

 

(7,974)

Derivatives

 

 

(33,667)

 

 

6,709

 

 

233

 

 

 —

 

 

(26,725)

Foreign currency

 

 

29,336

 

 

1,171

 

 

(200)

 

 

 —

 

 

30,307

Earnings from unconsolidated entities

 

 

 —

 

 

(2,724)

 

 

 —

 

 

 —

 

 

(2,724)

Recognition of realized gains / (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 —

 

 

17,435

 

 

 —

 

 

 —

 

 

17,435

Securities

 

 

 —

 

 

1,371

 

 

 —

 

 

 —

 

 

1,371

Derivatives

 

 

2,928

 

 

(4,433)

 

 

 —

 

 

 —

 

 

(1,505)

Foreign currency

 

 

(3,957)

 

 

(1,445)

 

 

 —

 

 

 —

 

 

(5,402)

Earnings from unconsolidated entities

 

 

 —

 

 

1,789

 

 

 —

 

 

 —

 

 

1,789

Core Earnings (Loss)

 

$

107,307

 

$

60,917

 

$

2,639

 

$

(47,181)

 

$

123,682

Core Earnings (Loss) per Weighted Average Diluted Share

 

$

0.48

 

$

0.27

 

$

0.01

 

$

(0.21)

 

$

0.55

(1)

Certain prior period costs and expenses and other income have been reclassified from the Lending Segment to the Property Segment to conform to our current period presentation of both GAAP and non-GAAP financial measures. Refer to Note 22 of our Condensed Consolidated Financial Statements for further information.

 

Lending Segment

 

The Lending Segment’s Core Earnings decreased by $8.8 million, from $107.3 million during the first quarter of 2015 to $98.5 million in the first quarter of 2016. After making adjustments for the calculation of Core Earnings, revenues were $124.2 million, costs and expenses were $26.4 million and other income was $1.1 million.

 

Core revenues, consisting principally of interest income on loans, decreased by $11.7 million in the first quarter of 2016 primarily due to (i) a $12.9 million decrease in interest income from investment securities principally due to maturities after March 31, 2015 of two preferred equity interests we held in companies that own commercial real estate, and the absence of $5.4 million of income realized upon the collection of a RMBS in the first quarter of 2015, partially offset by (ii) a $1.2 million increase in interest income from loans, which reflects a $125.7 million net increase in loan investments of our Lending Segment between March 31, 2015 and 2016.

 

61


 

Core costs and expenses decreased by $1.0 million in the first quarter of 2016 primarily due to a $1.4 million decrease in G&A expenses reflecting lower compensation costs and a $0.4 million decrease in investment pursuit costs, partially offset by a $0.8 million increase in interest expense associated with the various secured financing facilities used to fund the growth of our investment portfolio.    

 

Core other income (loss) improved by $2.0 million, principally due to a decrease in losses on foreign currency denominated assets, partially offset by a decrease in gains on related derivatives.

 

Investing and Servicing Segment

 

The Investing and Servicing Segment’s Core Earnings decreased by $8.5 million, from $60.9 million during the first quarter of 2015 to $52.4 million in the first quarter of 2016.  After making adjustments for the calculation of Core Earnings, revenues were $95.5 million, costs and expenses were $31.3 million, other loss was $11.8 million and income taxes were nominal.

 

Core revenues increased by $6.5 million in the first quarter of 2016, primarily due to increases of $20.0 million in interest income from our CMBS portfolio and $3.8 million in rental income on our expanded REO Portfolio, partially offset by decreases of $14.7 million in servicing fees and $2.1 million in interest income on loans held-for-sale. 

 

Core costs and expenses decreased by $6.0 million in the first quarter of 2016, primarily due to lower incentive compensation, partially offset by an increase in interest expense on secured financings for CMBS and the REO Portfolio.

 

Core other income decreased by $37.0 million to a loss in the first quarter of 2016, primarily reflecting the absence of both a $16.6 million gain on the sale of a commercial real estate asset and $11.2 million of gains on sales of CMBS, combined with a $12.6 million decrease in gains on sales of conduit loans.

 

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased $16.0 million due to a decrease in the taxable income of our TRSs.

 

Property Segment

 

During the three months ended March 31, 2015, there was no significant activity in the Property Segment except for equity in earnings of the Retail Fund. Therefore a comparison of results of this segment for the three months ended March 31, 2016 to the three months ended March 31, 2015 is not meaningful.

 

The Property Segment contributed Core Earnings of $9.8 million during the first quarter of 2016. After making adjustments for the calculation of Core Earnings, revenues were $24.6 million, costs and expenses were $15.1 million and other income was $0.3 million.

 

Core revenues consisted of $24.6 million of rental income from the Woodstar and Ireland Portfolios.

 

Core costs and expenses of $15.1 million consisted primarily of $9.6 million of rental related costs and $4.9 million of interest expense on the secured financing for the Woodstar and Ireland Portfolios.

 

Corporate

 

Core corporate costs and expenses decreased by $5.4 million, from $47.2 million in the first quarter of 2015 to $41.8 million in the first quarter of 2016. This decrease was primarily due to the absence of a $5.3 million loss on extinguishment of a portion of our convertible senior notes due 2019 during the first quarter of 2015. 

 

 

62


 

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, 2015, other than as set forth below.  Refer to our Form 10-K for a description of these strategies.

 

Cash and Cash Equivalents

 

As of March 31, 2016, we had cash and cash equivalents of $335.2 million.

 

Cash Flows for the Three Months Ended March 31, 2016 (amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

VIE

    

Excluding Investing

 

 

GAAP

 

Adjustments

 

and Servicing VIEs

Net cash provided by operating activities

 

$

131,129

 

$

(66)

 

$

131,063

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(472,237)

 

 

(17,860)

 

 

(490,097)

Proceeds from principal collections and sale of loans

 

 

290,695

 

 

 —

 

 

290,695

Purchase of investment securities

 

 

(84,337)

 

 

(13,395)

 

 

(97,732)

Proceeds from sales and collections of investment securities

 

 

22,344

 

 

8,319

 

 

30,663

Real estate business combinations, net of cash acquired

 

 

(73,639)

 

 

(24,653)

 

 

(98,292)

Net cash flows from other investments and assets

 

 

(6,575)

 

 

 —

 

 

(6,575)

Decrease in restricted cash, net

 

 

(24,930)

 

 

 —

 

 

(24,930)

Net cash used in investing activities

 

 

(348,679)

 

 

(47,589)

 

 

(396,268)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

Borrowings under financing agreements

 

 

991,192

 

 

 —

 

 

991,192

Principal repayments on and repurchases of borrowings

 

 

(626,462)

 

 

 —

 

 

(626,462)

Payment of deferred financing costs

 

 

(5,969)

 

 

 —

 

 

(5,969)

Proceeds from common stock issuances, net of offering costs

 

 

82

 

 

 —

 

 

82

Payment of dividends

 

 

(114,624)

 

 

 —

 

 

(114,624)

Contributions from non-controlling interests

 

 

6,584

 

 

 —

 

 

6,584

Distributions to non-controlling interests

 

 

(582)

 

 

 —

 

 

(582)

Purchase of treasury stock

 

 

(19,723)

 

 

 —

 

 

(19,723)

Issuance of debt of consolidated VIEs

 

 

596

 

 

(596)

 

 

 —

Repayment of debt of consolidated VIEs

 

 

(55,729)

 

 

55,729

 

 

 —

Distributions of cash from consolidated VIEs

 

 

7,545

 

 

(7,545)

 

 

 —

Net cash provided by financing activities

 

 

182,910

 

 

47,588

 

 

230,498

Net increase in cash and cash equivalents

 

 

(34,640)

 

 

(67)

 

 

(34,707)

Cash and cash equivalents, beginning of period

 

 

368,815

 

 

(978)

 

 

367,837

Effect of exchange rate changes on cash

 

 

1,044

 

 

 —

 

 

1,044

Cash and cash equivalents, end of period

 

$

335,219

 

$

(1,045)

 

$

334,174

 

The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of the Investing and Servicing Segment’s VIEs under ASC 810. These adjustments principally relate to (i) purchase of CMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP basis and (ii) sales of CMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP basis. There is no significant net impact to cash flows from operations or to overall cash resulting from these consolidations. Refer to Note 2 of our Condensed Consolidated Financial Statements for further discussion.

 

63


 

Cash and cash equivalents decreased by $34.7 million during the three months ended March 31, 2016, reflecting net cash provided by operating activities of $131.1 million and net cash provided by financing activities of $230.5 million partially offset by net cash used in investing activities of $396.3 million.

 

Net cash provided by operating activities of $131.1 million for the three months ended March 31, 2016 related primarily to cash interest income of $140.9 million from our loan origination and conduit programs, plus cash interest income on investment securities of $53.4 million. Servicing fees provided cash of $36.4 million, rental income provided cash of $20.0 million and other revenues provided $8.0 million. Offsetting these revenues were cash interest expense of $50.2 million, general and administrative expenses of $29.6 million, management fees of $26.3 million, a net change in operating assets and liabilities of $19.3 million, acquisition and investment pursuit costs of $1.3 million and income tax payments of $0.9 million.

 

Net cash used in investing activities of $396.3 million for the three months ended March 31, 2016 related primarily to the origination and acquisition of new loans held-for-investment of $490.1 million, the purchase of real estate property of $98.3 million and the purchase of investment securities of $97.7 million, partially offset by proceeds received from principal collections and sales of loans of $290.7 million and investment securities of $30.7 million.

 

Net cash provided by financing activities of $230.5 million for the three months ended March 31, 2016 related primarily to net borrowings after repayments of our secured debt of $364.7 million, partially offset by dividend distributions of $114.6 million, share repurchases of $19.7 million and payment of deferred financing costs of $6.0 million.

 

64


 

Our Investment Portfolio

 

Lending Segment

 

The following table sets forth the amount of each category of investments we owned across various property types within our Lending Segment as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unlevered

 

 

 

    

Face

    

Carrying

    

Asset Specific

    

Net

    

 

    

Return on

 

 

 

 

Amount

 

Value

 

Financing

 

Investment

 

Vintage

 

Asset

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages (1)

 

$

5,064,250

 

$

5,012,770

 

$

2,469,495

 

$

2,543,275

 

1989-2016

 

6.9

%

 

Subordinated mortgages

 

 

414,875

 

 

392,315

 

 

6,021

 

 

386,294

 

1998-2015

 

11.3

%

 

Mezzanine loans (1)

 

 

754,284

 

 

770,120

 

 

 —

 

 

770,120

 

2006-2015

 

10.9

%

 

Loans transferred as secured borrowings

 

 

89,905

 

 

88,512

 

 

89,905

 

 

(1,393)

 

N/A

 

 

 

 

Loan loss allowance

 

 

 —

 

 

(5,268)

 

 

 —

 

 

(5,268)

 

N/A

 

 

 

 

RMBS

 

 

327,167

 

 

210,898

 

 

71,707

 

 

139,191

 

2003-2007

 

10.5

%

 

HTM securities (2)

 

 

328,129

 

 

327,831

 

 

176,344

 

 

151,487

 

2013-2015

 

6.6

%

 

Equity security

 

 

13,123

 

 

13,911

 

 

 —

 

 

13,911

 

N/A

 

 

 

 

Investments in unconsolidated entities

 

 

N/A

 

 

30,311

 

 

 —

 

 

30,311

 

N/A

 

 

 

 

 

 

$

6,991,733

 

$

6,841,400

 

$

2,813,472

 

$

4,027,928

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages (1)

 

$

4,776,576

 

$

4,723,852

 

$

2,154,287

(3)

$

2,569,565

 

1989-2015

 

6.9

%

 

Subordinated mortgages

 

 

416,713

 

 

392,563

 

 

6,021

 

 

386,542

 

1998-2015

 

11.2

%

 

Mezzanine loans (1)

 

 

850,024

 

 

862,693

 

 

 —

 

 

862,693

 

2006-2015

 

10.9

%

 

Loans transferred as secured borrowings

 

 

88,000

 

 

86,573

 

 

88,000

 

 

(1,427)

 

N/A

 

 

 

 

Loan loss allowance

 

 

 —

 

 

(6,029)

 

 

 —

 

 

(6,029)

 

N/A

 

 

 

 

RMBS

 

 

233,976

 

 

176,224

 

 

2,000

 

 

174,224

 

2003-2007

 

11.9

%

 

HTM securities (2)

 

 

321,193

 

 

321,244

 

 

179,589

 

 

141,655

 

2013-2015

 

6.5

%

 

Equity security

 

 

13,471

 

 

14,498

 

 

 —

 

 

14,498

 

N/A

 

 

 

 

Investments in unconsolidated entities

 

 

N/A

 

 

30,827

 

 

 —

 

 

30,827

 

N/A

 

 

 

 

 

 

$

6,699,953

 

$

6,602,445

 

$

2,429,897

 

$

4,172,548

 

 

 

 

 

 


(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 $1.0 billion and $930.0 million being classified as first mortgages as of March 31, 2016 and December 31, 2015, respectively.

(2)

CMBS held-to-maturity (“HTM”) and mandatorily redeemable preferred equity interests in commercial real estate entities.

(3)

Amounts reclassified in accordance with ASU 2015-03 as discussed in Note 2 to the Condensed Consolidated Financial Statements.

65


 

As of March 31, 2016 and December 31, 2015, our Lending Segment’s investment portfolio, excluding RMBS and other investments, had the following characteristics based on carrying values:

 

 

 

 

 

 

 

Collateral Property Type

    

March 31, 2016

    

December 31, 2015

 

Office

 

39.2

%  

39.4

%

Hospitality

 

27.2

%  

28.2

%

Mixed Use

 

12.5

%  

12.8

%

Multi-family

 

11.8

%  

9.0

%

Retail

 

5.6

%  

6.4

%

Industrial

 

1.9

%  

1.9

%

Residential

 

1.8

%  

2.3

%

 

 

100.0

%  

100.0

%

 

 

 

 

 

 

 

 

 

 

Geographic Location

    

March 31, 2016

    

December 31, 2015

 

North East

 

28.4

%  

28.8

%

West

 

22.1

%  

23.2

%

South East

 

18.9

%  

17.3

%

International

 

13.2

%  

13.1

%

South West

 

7.0

%  

7.1

%

Midwest

 

6.4

%  

6.4

%

Mid Atlantic

 

4.0

%  

4.1

%

 

 

100.0

%  

100.0

%

 

 

 

Investing and Servicing Segment

 

The following table sets forth the amount of each category of investments we owned within our Investing and Servicing Segment as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

Asset

    

 

 

 

 

 

Face

 

Carrying

 

Specific

 

Net

 

 

 

Amount

 

Value

 

Financing

 

Investment

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fair value option

 

$

4,587,460

 

$

1,012,618

(1)  

$

215,064

 

$

797,554

 

Intangible assets - servicing rights

 

 

N/A

 

 

124,979

(2)

 

 —

 

 

124,979

 

Lease intangibles, net

 

 

N/A

 

 

17,802

 

 

 —

 

 

17,802

 

Loans held-for-sale, fair value option

 

 

151,970

 

 

154,225

 

 

82,881

 

 

71,344

 

Loans held-for-investment

 

 

17,717

 

 

17,717

 

 

 —

 

 

17,717

 

Investment in unconsolidated entities

 

 

N/A

 

 

52,463

 

 

 —

 

 

52,463

 

Properties, net

 

 

N/A

 

 

172,289

 

 

99,939

 

 

72,350

 

 

 

$

4,757,147

 

$

1,552,093

 

$

397,884

 

$

1,154,209

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fair value option

 

$

4,704,136

 

$

1,038,200

(1)

$

193,944

 

$

844,256

 

Intangible assets - servicing rights

 

 

N/A

 

 

134,153

(2)

 

 —

 

 

134,153

 

Lease intangibles, net

 

 

N/A

 

 

14,621

 

 

 —

 

 

14,621

 

Loans held-for-sale, fair value option

 

 

203,710

 

 

203,865

 

 

145,803

(3)

 

58,062

 

Investment in unconsolidated entities

 

 

N/A

 

 

53,145

 

 

 —

 

 

53,145

 

Properties, net

 

 

N/A

 

 

150,497

 

 

82,513

(3)

 

67,984

 

 

 

$

4,907,846

 

$

1,594,481

 

$

422,260

 

$

1,172,221

 


(1)

Includes $915.9 million and $825.2 million of CMBS reflected in “VIE liabilities” in accordance with ASC 810 as of March 31, 2016 and December 31, 2015, respectively.

(2)

Includes $27.4 million and $11.8 million of servicing rights intangibles reflected in “VIE assets” in accordance with ASC 810 as of March 31, 2016 and December 31, 2015, respectively.

66


 

(3)

Amounts reclassified in accordance with ASU 2015-03 as discussed in Note 2 to the Condensed Consolidated Financial Statements.

 

Our Investing and Servicing Segment’s REO Portfolio, as defined in Note 3 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $165.8 million and $140.9 million as of March 31, 2015 and December 31, 2015, respectively:

 

 

 

 

 

 

 

Property Type

    

March 31, 2016

    

December 31, 2015

 

Retail

 

69.2

%  

71.4

%

Multi-family

 

16.7

%  

18.9

%

Self-Storage

 

8.2

%  

9.7

%

Mixed Use

 

5.9

%  

 —

%

 

 

100.0

%  

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

Geographic Location

    

March 31, 2016

    

December 31, 2015

 

South East

 

30.6

%  

35.3

%

North East

 

30.1

%  

35.7

%

South West

 

12.6

%  

14.9

%

Mid Atlantic

 

9.0

%  

 —

%

West

 

8.9

%  

3.6

%

Midwest

 

8.8

%  

10.5

%

 

 

100.0

%  

100.0

%

 

 

 

Property Segment

 

The following table sets forth the amount of each category of investments, which are comprised of properties, the Retail Fund and intangible lease assets and liabilities, held within our Property Segment as of March 31, 2016 and December 31, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

Properties, net

 

$

982,686

 

$

768,728

Lease intangibles, net

 

 

58,100

 

 

58,658

Investment in unconsolidated entities

 

 

121,297

 

 

122,454

 

 

$

1,162,083

 

$

949,840

 

The following table sets forth our net investment and other information regarding the Property Segment’s properties and intangible lease assets and liabilities as of March 31, 2016 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Net

    

Asset

    

 

    

 

    

Weighted Average

 

 

Carrying

 

Specific

 

Net

 

Occupancy

 

Remaining

 

 

Value

 

Financing

 

Investment

 

Rate

 

Lease Term

Office—Ireland Portfolio

 

$

482,532

 

$

318,264

 

$

164,268

 

98.5

%

 

10.4 years

Multi-family residential—Ireland Portfolio

 

 

17,554

 

 

11,584

 

 

5,970

 

97.0

%

 

0.5 years

Multi-family residential—Woodstar Portfolio

 

 

540,700

 

 

382,934

 

 

157,766

 

97.8

%

 

0.5 years

 

 

$

1,040,786

 

$

712,782

 

$

328,004

 

 

 

 

 

 

 

New Credit Facilities and Amendments

 

Refer to Note 9 of our Condensed Consolidated Financial Statements for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2015.

 

67


 

Borrowings under Various Secured Financing Arrangements

 

The following table is a summary of our financing facilities as of March 31, 2016 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

  

 

  

Pledged

    

 

 

    

 

 

   

Approved

    

 

 

 

 

 

 

 

 

 

 

Asset

 

Maximum

 

 

 

 

but

 

Unallocated

 

 

Current

 

Extended

 

 

 

Carrying

 

Facility

 

Outstanding

 

Undrawn

 

Financing

 

 

Maturity

 

Maturity(a)

 

Pricing

 

Value

 

Size

 

Balance

 

Capacity(b)

 

Amount(c)

Lender 1 Repo 1

 

(d)

 

(d)

 

LIBOR + 1.85% to 5.25%

 

$

2,155,043

 

$

1,600,000

 

$

1,340,634

 

$

49,952

 

$

209,414

Lender 2 Repo 1

 

Oct 2017

 

Oct 2020

 

LIBOR + 1.75% to 2.75%

 

 

285,237

 

 

500,000

 

 

175,912

 

 

45,224

 

 

278,864

Lender 3 Repo 1

 

May 2017

 

May 2019

 

LIBOR + 2.50% to 2.85%

 

 

152,414

 

 

109,745

 

 

109,745

 

 

 —

 

 

 —

Lender 4 Repo 1

 

Oct 2016

 

Oct 2017

 

LIBOR + 2.00%

 

 

385,003

 

 

301,518

 

 

301,518

 

 

 —

 

 

 —

Lender 4 Repo 2

 

Dec 2018

 

Dec 2020

 

LIBOR + 2.50%

 

 

192,257

 

 

1,000,000

(e)

 

151,999

 

 

 —

 

 

848,001

Lender 6 Repo 1

 

Aug 2018

 

N/A

 

LIBOR + 2.50% to 3.00%

 

 

702,162

 

 

500,000

 

 

413,104

 

 

74,268

 

 

12,628

Lender 7 Secured Financing

 

Jul 2018

 

Jul 2019

 

LIBOR + 2.75% (f)

 

 

109,285

 

 

650,000

(g)

 

 —

 

 

 —

 

 

650,000

Conduit Repo 1

 

Sep 2016

 

N/A

 

LIBOR + 1.95% to 3.35%

 

 

 —

 

 

150,000

 

 

 —

 

 

 —

 

 

150,000

Conduit Repo 2

 

Nov 2016

 

N/A

 

LIBOR + 2.10%

 

 

 —

 

 

150,000

 

 

 —

 

 

 —

 

 

150,000

Conduit Repo 3

 

Feb 2018

 

Feb 2019

 

LIBOR + 2.10%

 

 

96,986

 

 

150,000

 

 

71,599

 

 

 —

 

 

78,401

Conduit Repo 4

 

Oct 2017

 

Oct 2020

 

LIBOR + 2.25%

 

 

16,842

 

 

100,000

 

 

12,188

 

 

 —

 

 

87,812

CMBS Repo 1

 

(h)

 

(h)

 

LIBOR + 1.90%

 

 

32,710

 

 

21,354

 

 

21,354

 

 

 —

 

 

 —

CMBS Repo 2

 

Dec 2017

 

N/A

 

LIBOR + 2.35% to 2.70%

 

 

132,740

 

 

100,238

 

 

100,238

 

 

 —

 

 

 —

CMBS Repo 3

 

(i)

 

(i)

 

LIBOR + 1.40% to 1.85%

 

 

365,199

 

 

260,777

 

 

260,777

 

 

 —

 

 

 —

RMBS Repo 1

 

(j)

 

N/A

 

LIBOR + 1.90%

 

 

168,001

 

 

125,000

 

 

71,707

 

 

26,257

 

 

27,036

Investing and Servicing Segment Property Mortgages

 

June 2018 to Dec 2025

 

N/A

 

Various

 

 

133,136

 

 

106,055

 

 

100,715

 

 

 —

 

 

 —

Ireland Portfolio Mortgage

 

May 2020

 

N/A

 

EURIBOR + 1.69%

 

 

500,086

 

 

334,623

 

 

334,623

 

 

 —

 

 

 —

Woodstar Portfolio Mortgages

 

Nov 2025 to Jan 2026

 

N/A

 

3.72% to 3.81%

 

 

338,281

 

 

248,630

 

 

248,630

 

 

 —

 

 

 —

Woodstar Portfolio Government Financing

 

Mar 2026 to June 2049

 

N/A

 

1.00% to 5.00%

 

 

296,321

 

 

135,437

 

 

135,437

 

 

 —

 

 

 —

Term Loan

 

Apr 2020

 

N/A

 

LIBOR + 2.75% (f)

 

 

3,015,838

 

 

656,578

 

 

656,578

 

 

 —

 

 

 —

FHLB Advances

 

Nov 2016

 

N/A

 

LIBOR + 0.37%

 

 

10,746

 

 

9,250

 

 

9,250

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

$

9,088,287

 

$

7,209,205

 

 

4,516,008

 

$

195,701

 

$

2,492,156

Unamortized premium, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,099

 

 

 

 

 

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,147)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,480,960

 

 

 

 

 

 


(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 lender 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 lender.

 

(d)

Maturity date for borrowings collateralized by loans is January 2017 before extension options and January 2019 assuming the exercise of initial extension options.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed January 2023.   

 

(e)

The initial maximum facility size of $600.0 million may be increased to $1.0 billion at our option, subject to certain conditions.

 

(f)

Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement. The term loan is also subject to a 75 basis point floor.

 

(g)

The initial maximum facility size of $450.0 million may be increased to $650.0 million at our option, subject to certain conditions.

 

(h)

Facility carries a rolling 11 month term which may reset monthly with the lender’s consent not to exceed December 2018.  This facility carries no maximum facility size.  Amount herein reflects the outstanding balance as of March 31, 2016.

 

(i)

Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is March 2017. This facility carries no maximum facility size. Amount herein reflects the outstanding balance as of March 31, 2016.

 

(j)

The date that is 180 days after the buyer delivers notice to seller, subject to a maximum date of March 2017.

 

As of March 31, 2016, Wells Fargo Bank, N.A. is our largest creditor through two repurchase facilities (Lender 1 Repo 1 facility and RMBS Repo 1 facility).

 

Refer to Note 9 of our Condensed Consolidated Financial Statements for further disclosure regarding the terms of our financing arrangements.

 

68


 

Borrowings under Convertible Senior Notes

 

The following table is a summary of our unsecured convertible senior notes outstanding as of March 31, 2016 (amounts in thousands, except rates):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

 

    

 

    

 

    

Remaining

 

 

Principal

 

Coupon

 

Effective

 

Conversion

 

Maturity

 

Period of

 

 

Amount

 

Rate

 

Rate

 

Rate

 

Date

 

Amortization

2017 Notes

 

$

431,250

 

3.75

%  

5.87

%  

41.7397

 

10/15/2017

 

1.5

years

2018 Notes

 

$

599,981

 

4.55

%  

6.10

%  

46.4599

 

3/1/2018

 

1.9

years

2019 Notes

 

$

341,363

 

4.00

%  

5.35

%  

49.2239

 

1/15/2019

 

2.8

years

 

During both the three months ended March 31, 2016 and 2015, the weighted average effective borrowing rates on our convertible senior notes was 5.7%.  These effective borrowing rates include the effects of underwriter purchase discount and the adjustment for the conversion option, the initial value of which reduced the balance of the notes.

 

Refer to Note 10 of our Condensed Consolidated Financial Statements for further disclosure regarding the terms of our convertible senior notes. 

 

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 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average

 

 

 

 

Explanations

 

 

Quarter-End

 

Balance During

 

 

 

for Significant

Quarter Ended

    

Balance

    

Quarter

    

Variance

    

Variances

December 31, 2015

 

$

4,020,737

 

$

3,809,666

 

$

211,071

 

(a)

March 31, 2016

 

 

4,516,008

 

 

4,227,953

 

 

288,055

 

(b)


(a)

Variance primarily due to the following: (i) $139.6 million drawn on the Lender 6 Repo 1 facility in December 2015; and (ii) $100.7 million of Woodstar Portfolio Mortgages in December 2015.

 

(b)

Variance primarily due to the following: (i) $196.3 million drawn on the Lender 1 Repo 1 facility in March 2016; and (ii) $27.2 million drawn on the CMBS Repo 3 facility in March 2016.

 

Scheduled Principal Repayments on Investments and Overhang on Financing Facilities

 

The following scheduled and/or projected principal repayments on our investments were based upon the amounts outstanding and contractual terms of the financing facilities in effect as of March 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Scheduled Principal

    

Scheduled/Projected

    

Projected/Required

    

Scheduled Principal

 

 

 

Repayments on Loans

 

Principal Repayments

 

Repayments of

 

Inflows Net of

 

 

 

and HTM Securities

 

on RMBS and CMBS

 

Financing

 

Financing Outflows

 

Second Quarter 2016

 

$

232,887

 

$

22,069

 

$

(90,843)

 

$

164,113

 

Third Quarter 2016

 

 

332,371

 

 

21,208

 

 

(123,834)

 

 

229,745

 

Fourth Quarter 2016

 

 

495,101

 

 

75,336

 

 

(155,527)

 

 

414,910

 

First Quarter 2017

 

 

131,682

 

 

70,261

 

 

(364,762)

 

 

(162,819)

 

Total

 

$

1,192,041

 

$

188,874

 

$

(734,966)

 

$

645,949

 

 

In the normal course of business, the Company is in discussions with its lenders to extend or amend any financing facilities which contain near term expirations.

 

69


 

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, 2016, we had 100,000,000 shares of preferred stock available for issuance and 262,388,030 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, including other secured as well as unsecured forms of borrowing and sale of certain investment securities which no longer meet our return requirements.

 

Repurchases of Equity Securities and Convertible Senior Notes

 

In September 2014, our board of directors authorized and announced the repurchase of up to $250 million of our outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved by our board of directors in December 2014, June 2015 and January 2016 resulted in the program being (i) amended to increase maximum repurchases to $500 million, (ii) expanded to allow for the repurchase of our outstanding convertible senior notes under the program and (iii) extended through January 2017. Purchases made pursuant to the program are made in either the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases are discretionary and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. During the three months ended March 31, 2016, we repurchased $19.7 million of common stock and no convertible senior notes under the repurchase program.  As of March 31, 2016, we have $282.1 million of remaining capacity to repurchase common stock and/or convertible senior notes under the repurchase program. 

Off-Balance Sheet Arrangements

 

We have relationships with unconsolidated entities and financial partnerships, such as entities often referred to as VIEs. Our maximum risk of loss associated with our involvement in VIEs is limited to the carrying value of our investment in the entity and any unfunded capital commitments. Refer to Note 14 of our Condensed Consolidated Financial Statements for further discussion.

 

Dividends

 

We intend to continue to make regular quarterly distributions to holders of our common stock. 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 intend to continue to pay regular quarterly dividends to our stockholders in an amount approximating our net taxable income, 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.

 

70


 

The Company’s board of directors declared the following dividends during the three months ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

Declare Date

    

Record Date

    

Payment Date

    

Amount

    

Frequency

 

2/25/16

 

3/31/16

 

4/15/16

 

$

0.48

 

Quarterly

 

 

On May 9, 2016, our board of directors declared a dividend of $0.48 per share for the second quarter of 2016, which is payable on July 15, 2016 to common stockholders of record as of June 30, 2016.

 

Leverage Policies

 

Our strategies with regards to use of leverage have not changed significantly since December 31, 2015.  Refer to our Form 10-K for a description of our strategies regarding use of leverage.

 

Contractual Obligations and Commitments

 

Contractual obligations as of March 31, 2016 are as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Less than

    

 

 

    

 

 

    

More than

 

 

 

Total

 

1 year

 

1 to 3 years

 

3 to 5 years

 

5 years

 

Secured financings (a)

 

$

4,516,008

 

$

734,966

 

$

1,772,273

 

$

1,504,891

 

$

503,878

 

Convertible senior notes 

 

 

1,372,594

 

 

 —

 

 

1,372,594

 

 

 —

 

 

 —

 

Secured borrowings on transferred loans (b)

 

 

111,702

 

 

 —

 

 

111,702

 

 

 —

 

 

 —

 

Loan funding commitments (c)

 

 

1,157,296

 

 

706,909

 

 

428,922

 

 

21,465

 

 

 —

 

Future lease commitments 

 

 

33,472

 

 

6,995

 

 

13,436

 

 

11,717

 

 

1,324

 

Total 

 

$

7,191,072

 

$

1,448,870

 

$

3,698,927

 

$

1,538,073

 

$

505,202

 

 


(a)

Includes available extension options.

(b)

These amounts relate to financial asset sales that were required to be accounted for as secured borrowings. As a result, the assets we sold remain on our consolidated balance sheet for financial reporting purposes. Such assets are expected to provide match funding for these liabilities.

(c)

Excludes $282.8 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 either earlier than, or in excess of, expectations.  In addition, this amount excludes any funding commitments which may be required pursuant to Company guarantees.  In limited instances, specifically with loans involving multiple construction lenders, the Company has guaranteed the future funding obligations of certain third party lenders in the event that such third parties fail to fund their proportionate share of the obligation in a timely manner.  We are currently unaware of any circumstances which would require us to make payments under any of these guarantees and, as a result, have not included any such amounts in the above table. 

 

The table above does not include interest payable, amounts due under our management agreement or derivative agreements as those contracts do not have fixed and determinable payments.

 

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, 2015.

 

 

71


 

Item 3.   Quantitative and Qualitative Disclosures 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 have not changed materially since December 31, 2015.  Refer to our Form 10-K, Item 7A for further discussion.

 

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 Manager’s 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 index instruments.  The following table presents our credit index instruments as of March 31, 2016 and December 31, 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Face Value of

    

Aggregate Notional Value of

    

Number of

 

 

 

Loans Held-for-Sale

 

Credit Index Instruments

 

Credit Index Instruments

 

March 31, 2016

 

$

151,970

 

$

36,000

 

9

 

December 31, 2015

 

$

203,710

 

$

40,000

 

11

 

 

Refer to Note 5 of our Condensed Consolidated Financial Statements for a discussion of weighted average ratings of our investment securities.

 

Capital Market Risk

 

We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under repurchase obligations or other debt instruments. As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing, and terms of capital we raise.

 

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

72


 

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, 2016 and December 31, 2015 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Aggregate Notional

    

 

 

 

 

Face Value of

 

Value of Interest

 

Number of Interest

 

 

 

Hedged Instruments

 

Rate Derivatives

 

Rate Derivatives

 

Instrument hedged as of March 31, 2016

 

 

 

 

 

 

 

 

 

Loans held-for-investment 

 

$

8,000

 

$

8,000

 

1

 

Loans held-for-sale 

 

 

151,970

 

 

119,500

 

33

 

RMBS, available-for-sale 

 

 

327,167

 

 

74,000

 

3

 

Secured financing agreements 

 

 

532,240

 

 

526,615

 

13

 

 

 

$

1,019,377

 

$

728,115

 

50

 

Instrument hedged as of December 31, 2015

 

 

 

 

 

 

 

 

 

Loans held-for-investment 

 

$

8,000

 

$

8,000

 

1

 

Loans held-for-sale 

 

 

203,710

 

 

162,700

 

27

 

RMBS, available-for-sale 

 

 

233,976

 

 

74,000

 

3

 

Secured financing agreements 

 

 

518,505

 

 

519,142

 

14

 

 

 

$

964,191

 

$

763,842

 

45

 

 

The following table summarizes the estimated annual change in net investment income for our LIBOR-based investments and our LIBOR-based debt assuming increases or decreases in LIBOR and adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Variable-rate

    

 

 

    

 

 

    

 

 

    

 

 

 

 

investments and

 

3.0%

 

2.0%

 

1.0%

 

1.0%

Income (Expense) Subject to Interest Rate Sensitivity

 

indebtedness

 

Increase

 

Increase

 

Increase

 

Decrease (1)

Investment income from variable-rate investments 

 

$

5,580,593

 

$

179,820

 

$

117,674

 

$

56,727

 

$

(16,131)

Interest expense from variable-rate debt 

 

 

(4,073,861)

 

 

(122,216)

 

 

(81,477)

 

 

(40,739)

 

 

15,911

Net investment income from variable rate instruments 

 

$

1,506,732

 

$

57,604

 

$

36,197

 

$

15,988

 

$

(220)

Impact per diluted average shares outstanding

 

 

 

 

$

0.24

 

$

0.15

 

$

0.07

 

$

 —


(1)

Assumes LIBOR does not go below 0%.

 

Foreign Currency Risk

 

We intend to hedge our 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 unavailability of 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, rental 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. 

 

 

 

73


 

The following table represents our current currency hedge exposure as it relates to our investments denominated in foreign currencies, along with the aggregate notional amount of the hedges in place (amounts in thousands except for number of contracts, using the March 31, 2016 GBP closing rate of 1.4358, Euro (“EUR”) closing rate of 1.1382, Swedish Krona (“SEK”) closing rate of 0.1232, Norwegian Krone (“NOK”) closing rate of 0.1211 and Danish Krone (“DKK”) closing rate of 0.1527):

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value of Net Investment

 

Local Currency

 

Number of Foreign Exchange Contracts

 

Aggregate Notional Value of Hedges Applied

 

Expiration Range of Contracts

$

53,793

 

GBP

 

14

 

$

66,972

 

May 2016 – July 2016

 

60,213

 

GBP

 

16

 

 

66,435

 

January 2017

 

10,176

 

GBP

 

1

 

 

9,611

 

June 2016

 

76,429

 

GBP

 

13

 

 

89,170

 

January 2018

 

5,706

 

EUR, DKK, NOK, SEK

 

8

 

 

7,524

 

December 2016

 

85,549

 

GBP

 

5

 

 

94,513

 

April 2016 – April 2017

 

1,940

 

GBP

 

3

 

 

2,605

 

June 2016 – March 2018

 

170,238

 

EUR

 

51

(1)

 

283,914

 

June 2016 – June 2020

 

13,911

 

GBP

 

9

 

 

14,960

 

April 2016 – January 2018

 

40,666

 

EUR

 

8

 

 

38,041

 

May 2016 – October 2016

 

60,263

 

EUR

 

22

 

 

63,858

 

October 2016

$

578,884

 

 

 

150

 

$

737,603

 

 


(1)

These foreign exchange contracts hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio. 

 

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, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

74


 

PART II—OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

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 the Form 10-K.

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

 

There were no unregistered sales of securities during the three months ended March 31, 2016.

 

Issuer Purchases of Equity Securities

 

The following table provides information regarding our purchases of common stock during the quarter ended March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares

 

Value of shares available

 

 

 

 

Average

 

purchased as part of

 

for purchase

 

 

Total number of

 

repurchase

 

publicly announced

 

under the program

Period

 

shares purchased

 

price per share

 

program (1)

 

(in thousands)

January 2016

 

981,689

 

$

18.71

 

981,689

 

$

283,448,810

February 2016

 

71,200

 

 

18.79

 

71,200

 

 

282,109,388

(1)

In September 2014, our board of directors authorized and announced the repurchase of up to $250 million of our outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved by our board of directors in December 2014, June 2015 and January 2016 resulted in the program being (i) amended to increase maximum repurchases to $500 million, (ii) expanded to allow for the repurchase of our outstanding convertible senior notes under the program and (iii) extended through January 2017.

 

Item 3.    Defaults Upon Senior Securities.

 

None.

 

Item 4.    Mine Safety Disclosures.

 

Not applicable.

 

Item 5.    Other Information.

 

None.

75


 

SIGNATURES

 

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 9, 2016

By:

/s/ BARRY S. STERNLICHT

 

 

Barry S. Sternlicht
Chief Executive Officer
Principal Executive Officer

 

 

 

Date: May 9, 2016

By:

/s/ RINA PANIRY

 

 

Rina Paniry
Chief Financial Officer, Treasurer, Chief Accounting Officer and Principal Financial Officer

 

76


 

 

Item 6.  Exhibits.

 

(a)Index to Exhibits

 

INDEX TO EXHIBITS

 

 

 

 

Exhibit No.

 

Description

31.1

 

Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

 

 

 

32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

32.2

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

77