Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
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 ofIncorporation or Organization)
(I.R.S. EmployerIdentification 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, $0.01 par value per share
STWD
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧
The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of April 30, 2021 was 286,985,112.
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:
2
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.
3
TABLE OF CONTENTS
Page
Part I
Financial Information
Item 1.
Financial Statements
5
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Operations
6
Condensed Consolidated Statements of Comprehensive Income
7
Condensed Consolidated Statements of Equity
8
Condensed Consolidated Statements of Cash Flows
9
Notes to Condensed Consolidated Financial Statements
11
Note 1 Business and Organization
Note 2 Summary of Significant Accounting Policies
12
Note 3 Acquisitions and Divestitures
18
Note 4 Loans
19
Note 5 Investment Securities
24
Note 6 Properties
27
Note 7 Investment in Unconsolidated Entities
29
Note 8 Goodwill and Intangibles
30
Note 9 Secured Borrowings
32
Note 10 Unsecured Senior Notes
35
Note 11 Loan Securitization/Sale Activities
36
Note 12 Derivatives and Hedging Activity
37
Note 13 Offsetting Assets and Liabilities
39
Note 14 Variable Interest Entities
Note 15 Related-Party Transactions
41
Note 16 Stockholders’ Equity and Non-Controlling Interests
43
Note 17 Earnings per Share
45
Note 18 Accumulated Other Comprehensive Income
46
Note 19 Fair Value
Note 20 Income Taxes
53
Note 21 Commitments and Contingencies
54
Note 22 Segment Data
55
Note 23 Subsequent Events
59
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
60
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
97
Item 4.
Controls and Procedures
99
Part II
Other Information
Legal Proceedings
100
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
101
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Starwood Property Trust, Inc. and Subsidiaries
(Unaudited, amounts in thousands, except share data)
As of
March 31, 2021
December 31, 2020
Assets:
Cash and cash equivalents
$
351,190
563,217
Restricted cash
118,724
158,945
Loans held-for-investment, net of credit loss allowances of $72,284 and $77,444 ($150,712 and $90,684 held at fair value)
12,321,493
11,087,073
Loans held-for-sale ($613,061 and $932,295 held at fair value)
844,631
1,052,835
Investment securities, net of credit loss allowances of $5,387 and $5,675 ($190,212 and $198,053 held at fair value)
678,287
736,658
Properties, net
2,244,748
2,271,153
Intangible assets ($12,406 and $13,202 held at fair value)
66,772
70,117
Investment in unconsolidated entities
100,907
108,054
Goodwill
259,846
Derivative assets
38,029
40,555
Accrued interest receivable
101,713
95,980
Other assets
208,873
190,748
Variable interest entity (“VIE”) assets, at fair value
62,367,110
64,238,328
Total Assets
79,702,323
80,873,509
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities
178,215
206,845
Related-party payable
36,135
39,170
Dividends payable
138,906
137,959
Derivative liabilities
34,805
41,324
Secured financing agreements, net
10,895,932
10,146,190
Collateralized loan obligations, net
931,178
930,554
Unsecured senior notes, net
1,735,658
1,732,520
VIE liabilities, at fair value
60,896,709
62,776,371
Total Liabilities
74,847,538
76,010,933
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, 294,300,251 issued and 286,851,560 outstanding as of March 31, 2021 and 292,091,601 issued and 284,642,910 outstanding as of December 31, 2020
2,943
2,921
Additional paid-in capital
5,225,037
5,209,739
Treasury stock (7,448,691 shares)
(138,022)
Accumulated other comprehensive income
41,654
43,993
Accumulated deficit
(654,750)
(629,733)
Total Starwood Property Trust, Inc. Stockholders’ Equity
4,476,862
4,488,898
Non-controlling interests in consolidated subsidiaries
377,923
373,678
Total Equity
4,854,785
4,862,576
Total Liabilities and Equity
Note: In addition to the VIE assets and liabilities which are separately presented, our condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 include assets of $1.1 billion and liabilities of $0.9 billion related to a consolidated collateralized loan obligation (“CLO”), which is considered to be a VIE. The CLO’s assets can only be used to settle obligations of the CLO, and the CLO’s liabilities do not have recourse to Starwood Property Trust, Inc. Refer to Note 14 for additional discussion of VIEs.
See notes to condensed consolidated financial statements.
(Unaudited, amounts in thousands, except per share data)
For the Three Months Ended
March 31,
2021
2020
Revenues:
Interest income from loans
190,575
217,427
Interest income from investment securities
11,610
15,240
Servicing fees
8,402
4,793
Rental income
76,338
74,146
Other revenues
305
954
Total revenues
287,230
312,560
Costs and expenses:
Management fees
38,736
40,728
Interest expense
103,374
120,025
General and administrative
38,636
38,702
Acquisition and investment pursuit costs
185
909
Costs of rental operations
28,745
28,214
Depreciation and amortization
22,474
23,980
Credit loss provision, net
44
48,669
Other expense
685
388
Total costs and expenses
232,879
301,615
Other income (loss):
Change in net assets related to consolidated VIEs
39,745
(45,493)
Change in fair value of servicing rights
(796)
(393)
Change in fair value of investment securities, net
(306)
2,504
Change in fair value of mortgage loans, net
(9,478)
(16,134)
Earnings from unconsolidated entities
1,734
Gain on sale of investments and other assets, net
17,693
296
Gain on derivative financial instruments, net
33,989
9,710
Foreign currency loss, net
(11,681)
(34,486)
Loss on extinguishment of debt
(516)
(170)
Other income, net
21
126
Total other income (loss)
70,405
(83,943)
Income (loss) before income taxes
124,756
(72,998)
Income tax (provision) benefit
(2,230)
6,729
Net income (loss)
122,526
(66,269)
Net income attributable to non-controlling interests
(11,148)
(500)
Net income (loss) attributable to Starwood Property Trust, Inc.
111,378
(66,769)
Earnings (loss) per share data attributable to Starwood Property Trust, Inc.:
Basic
0.39
(0.24)
Diluted
0.38
(Unaudited, amounts in thousands)
Other comprehensive (loss) income (net change by component):
Available-for-sale securities
(2,403)
(15,048)
Foreign currency translation
64
Other comprehensive loss
(2,339)
Comprehensive income (loss)
120,187
(81,317)
Less: Comprehensive income attributable to non-controlling interests
Comprehensive income (loss) attributable to Starwood Property Trust, Inc.
109,039
(81,817)
For the Three Months Ended March 31, 2021 and 2020
Total
Starwood
Accumulated
Property
Common stock
Additional
Other
Trust, Inc.
Non-
Par
Paid-in
Treasury Stock
Comprehensive
Stockholders’
Controlling
Shares
Value
Capital
Amount
Deficit
Income
Equity
Interests
Balance, December 31, 2020
292,091,601
7,448,691
Cumulative effect of convertible notes accounting standard update adopted January 1, 2021
(3,755)
2,219
(1,536)
Proceeds from DRIP Plan
12,234
262
Redemption of Class A Units
50,000
1
1,038
1,039
(1,039)
Equity offering costs
(22)
Share-based compensation
1,814,414
10,292
10,310
Manager fees paid in stock
332,002
7,483
7,486
Net income
11,148
Dividends declared, $0.48 per share
(138,614)
Other comprehensive loss, net
Contributions from non-controlling interests
2,969
Distributions to non-controlling interests
(8,833)
Balance, March 31, 2021
294,300,251
Balance, December 31, 2019
287,380,891
2,874
5,132,532
5,180,140
(104,194)
(381,719)
50,932
4,700,425
436,589
5,137,014
Cumulative effect of credit loss accounting standard effective January 1, 2020
(32,286)
7,718
153
409,712
8,534
8,538
(8,538)
(14)
Common stock repurchased
1,925,421
(28,830)
1,195,208
8,788
8,800
355,910
9,076
9,080
Net loss
500
(135,991)
VIE non-controlling interests
(2,188)
9,406
(66,476)
Balance, March 31, 2020
289,349,439
2,894
5,159,069
7,105,561
(133,024)
(616,765)
35,884
4,448,058
369,293
4,817,351
Cash Flows from Operating Activities:
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of deferred financing costs, premiums and discounts on secured borrowings
10,515
9,634
Amortization of discounts and deferred financing costs on unsecured senior notes
1,726
1,962
Accretion of net discount on investment securities
(3,476)
(2,783)
Accretion of net deferred loan fees and discounts
(16,745)
(12,080)
Change in fair value of investment securities
306
(2,504)
Change in fair value of consolidated VIEs
(7,042)
80,683
796
393
Change in fair value of loans
9,478
16,134
Change in fair value of derivatives
(34,768)
(7,617)
11,681
34,486
Gain on sale of investments and other assets
(17,693)
(296)
22,528
23,864
(1,734)
(97)
Distributions of earnings from unconsolidated entities
17
516
170
Origination and purchase of loans held-for-sale, net of principal collections
(327,352)
(621,832)
Proceeds from sale of loans held-for-sale
571,927
751,140
Changes in operating assets and liabilities:
Related-party payable, net
(3,035)
(1,659)
Accrued and capitalized interest receivable, less purchased interest
(41,833)
(31,465)
(19,467)
(40,944)
(25,945)
(6,764)
Net cash provided by operating activities
270,766
190,732
Cash Flows from Investing Activities:
Origination, purchase and funding of loans held-for-investment
(2,296,124)
(1,252,745)
Proceeds from principal collections on loans
1,051,695
812,187
Proceeds from loans sold
39,019
Purchase and funding of investment securities
(5,729)
Proceeds from sales of investment securities
7,940
Proceeds from principal collections on investment securities
59,514
13,559
Proceeds from sales of real estate
30,566
Purchases and additions to properties and other assets
(3,512)
(7,056)
(3,100)
Distribution of capital from unconsolidated entities
15,980
Payments for purchase or termination of derivatives
(851)
(67,323)
Proceeds from termination of derivatives
23,527
8,912
Net cash used in investing activities
(1,119,205)
(454,183)
Condensed Consolidated Statements of Cash Flows (Continued)
Cash Flows from Financing Activities:
Proceeds from borrowings
2,748,317
2,756,915
Principal repayments on and repurchases of borrowings
(2,001,336)
(1,923,754)
Payment of deferred financing costs
(5,052)
(3,577)
Proceeds from common stock issuances
Payment of equity offering costs
Payment of dividends
(137,667)
(135,889)
Purchase of treasury stock
Issuance of debt of consolidated VIEs
11,604
24,376
Repayment of debt of consolidated VIEs
(27,490)
(36,953)
Distributions of cash from consolidated VIEs
14,481
24,723
Net cash provided by financing activities
597,233
620,080
Net (decrease) increase in cash, cash equivalents and restricted cash
(251,206)
356,629
Cash, cash equivalents and restricted cash, beginning of period
722,162
574,031
Effect of exchange rate changes on cash
(1,042)
733
Cash, cash equivalents and restricted cash, end of period
469,914
931,393
Supplemental disclosure of cash flow information:
Cash paid for interest
80,624
109,341
Income taxes paid
425
569
Supplemental disclosure of non-cash investing and financing activities:
Dividends declared, but not yet paid
139,113
135,994
Consolidation of VIEs (VIE asset/liability additions)
393,373
2,477,422
Reclassification of loans held-for-investment to loans held-for-sale
166,901
422,691
Reclassification of loans held-for-sale to loans held-for-investment
124,935
Loan principal collections temporarily held at master servicer
31,965
9,779
Net assets acquired through conversion to equity interest
7,320
Redemption of Class A Units for common stock
10
As of March 31, 2021
(Unaudited)
1. Business and Organization
Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering. We are focused primarily on originating, acquiring, financing and managing mortgage loans and other real estate investments in both the United States (“U.S.”) and Europe. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.
We have four reportable business segments as of March 31, 2021 and we refer to the investments within these segments as our target assets:
Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).
We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of our taxable income to our stockholders by prescribed dates and comply with various other requirements.
We are organized as a holding company and conduct our business primarily through our various wholly-owned subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms of a management agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded by Mr. Sternlicht.
2. Summary of Significant Accounting Policies
Balance Sheet Presentation of Securitization Variable Interest Entities
We operate investment businesses that acquire unrated, investment grade and non-investment grade rated CMBS and RMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. Under accounting principles generally accepted in the United States of America (“GAAP”), SPEs typically qualify as VIEs. These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.
Because we often serve as the special servicer or servicing administrator of the trusts in which we invest, or we have the ability to remove and replace the special servicer without cause, consolidation of these structures is required pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator of these VIEs.
The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, a portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.
Refer to the segment data in Note 22 for a presentation of our business segments without consolidation of these VIEs.
Basis of Accounting and Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (our “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the full year.
Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, (iii) became significant since December 31, 2020 due to a corporate action or increase in the significance of the underlying business activity or (iv) changed upon adoption of an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”).
Variable Interest Entities
In addition to the securitization VIEs, we have financed a pool of our loans through a collateralized loan obligation (“CLO”) which is considered a VIE. We also hold interests in certain other entities which are considered VIEs as the limited partners of those entities with equity at risk do not collectively possess (i) the right to remove the general partner or dissolve the partnership without cause or (ii) the right to participate in significant decisions made by the partnership.
We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Accounting Standards Codification (“ASC”) 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. We consider our variable interests as well as any variable interests of our related parties in making this determination. Where both of these factors are present, we are deemed to be the primary beneficiary and we consolidate the VIE. Where either one of these factors is not present, we are not the primary beneficiary and do not consolidate the VIE.
To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes: (i) identifying the activities that most significantly impact the VIE’s economic performance; and (ii) identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE. The right to remove the decision maker in a VIE must be exercisable without cause for the decision maker to not be deemed the party that has the power to direct the activities of a VIE.
To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity investments, servicing fees and other arrangements deemed to be variable interests in the VIE. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.
Our purchased investment securities include unrated and non-investment grade rated securities issued by securitization trusts. In certain cases, we may contract to provide special servicing activities for these trusts, or, as holder of the controlling class, we may have the right to name and remove the special servicer for these trusts. In our role as special servicer, we provide services on defaulted loans within the trusts, such as foreclosure or work-out procedures, as permitted by the underlying contractual agreements. In exchange for these services, we receive a fee. These rights give us the ability to direct activities that could significantly impact the trust’s economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove us as special servicer without cause, we do not have the power to direct activities that most significantly impact the trust’s economic performance. We evaluated all of our positions in such investments for consolidation.
For securitization VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, a portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding amortization or change in fair value of the servicing intangible asset, are also eliminated in consolidation.
We perform ongoing reassessments of: (i) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework, and (ii) whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion regarding the VIE to change.
We elect the fair value option for initial and subsequent recognition of the assets and liabilities of our consolidated securitization VIEs. Interest income and interest expense associated with these VIEs are no longer relevant on a standalone basis because these amounts are already reflected in the fair value changes. We have elected to present these items in a single line on our condensed consolidated statements of operations. The residual difference shown on our condensed consolidated statements of operations in the line item “Change in net assets related to consolidated VIEs” represents our beneficial interest in the VIEs.
13
We separately present the assets and liabilities of our consolidated securitization VIEs as individual line items on our condensed consolidated balance sheets. The liabilities of our consolidated securitization VIEs consist solely of obligations to the bondholders of the related trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our consolidated securitization VIEs consist principally of loans, but at times, also include foreclosed loans which have been temporarily converted into real estate owned (“REO”). These assets in the aggregate are likewise presented as a single line item entitled “VIE assets.”
Loans comprise the vast majority of our securitization VIE assets and are carried at fair value due to the election of the fair value option. When an asset becomes REO, it is due to non-performance of the loan. Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value. Furthermore, when we consolidate a trust, any existing REO would be consolidated at fair value. Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.
In addition to sharing a similar measurement method as the loans in a trust, the securitization VIE assets as a whole can only be used to settle the obligations of the consolidated VIE. The assets of our securitization VIEs are not individually accessible by the bondholders, which creates inherent limitations from a valuation perspective. Also creating limitations from a valuation perspective is our role as special servicer, which provides us very limited visibility, if any, into the performing loans of a trust.
REO assets generally represent a very small percentage of the overall asset pool of a trust. In new issue trusts there are no REO assets. We estimate that REO assets constitute approximately 1% of our consolidated securitization VIE assets, with the remaining 99% representing loans. However, it is important to note that the fair value of our securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.
Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as opposed to its fair value. However, as a pool, the fair value of the assets in total is equal to the fair value of the liabilities.
For these reasons, the assets of our securitization VIEs are presented in the aggregate.
Fair Value Option
The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.
We have elected the fair value option for certain eligible financial assets and liabilities of our consolidated securitization VIEs, residential loans held-for-investment, loans held-for-sale originated or acquired for future securitization and purchased CMBS issued by VIEs we could consolidate in the future. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for residential loans held-for-investment were made in order to maintain consistency across all our residential loans. The fair value elections for mortgage loans held-for-sale were made due to the expected short-term holding period of these instruments.
14
Fair Value Measurements
We measure our mortgage-backed securities, derivative assets and liabilities, domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
As discussed above, we measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the securitization VIEs, we maximize the use of observable inputs over unobservable inputs. Refer to Note 19 for further discussion regarding our fair value measurements.
Loans Held-for-Investment
Loans that are held for investment (“HFI”) are carried at cost, net of unamortized acquisition premiums or discounts, loan fees and origination costs, as applicable, and net of credit loss allowances as discussed below, unless the loans are credit deteriorated or we have elected to apply the fair value option at purchase.
Loans Held-For-Sale
Our loans that we intend to sell or liquidate in the short-term are classified as held-for-sale and are carried at the lower of amortized cost or fair value, unless we have elected to apply the fair value option at origination or purchase.
Investment Securities
We designate our debt investment securities as held-to-maturity (“HTM”), available-for-sale (“AFS”), or trading depending on our investment strategy and ability to hold such securities to maturity. HTM debt securities where we have not elected to apply the fair value option are stated at cost plus any premiums or discounts, which are amortized or accreted through the condensed consolidated statements of operations using the effective interest method. Debt securities we (i) do not hold for the purpose of selling in the near-term, or (ii) may dispose of prior to maturity, are classified as AFS and are carried at fair value in the accompanying financial statements. Unrealized gains or losses on AFS debt securities where we have not elected the fair value option are reported as a component of accumulated other comprehensive income (“AOCI”) in stockholders’ equity. Our HTM and AFS debt securities are also subject to credit loss allowances as discussed below.
Our only equity investment security is carried at fair value, with unrealized holding gains and losses recorded in earnings.
Credit Losses
Loans and Debt Securities Measured at Amortized Cost
ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our HFI loans and our HTM debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities. However, as permitted by ASC 326, we have elected not to measure an allowance for credit losses on accrued interest receivable (which is classified separately on our condensed consolidated balance sheet), but rather write off in a timely manner by reversing interest income and/or cease accruing interest that would likely be uncollectible. Our adoption of the CECL model resulted in a $32.3 million increase to our total allowance for credit losses, which was recognized as a cumulative-effect adjustment to accumulated deficit as of January 1, 2020.
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As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. See Note 4 for further discussion of our methodologies.
We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly. Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan or security. If a loan or security is considered to be credit deteriorated, we depart from the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.
Available-for-Sale Debt Securities
Separate provisions of ASC 326 apply to our AFS debt securities, which are carried at fair value with unrealized gains and losses reported as a component of AOCI. We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration (“PCD”) by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis. As of the January 1, 2020 effective date, no such credit loss allowance gross-up was required on our AFS debt securities with PCD due to their individual unrealized gain positions as of that date.
Subsequently, cumulative adverse changes in expected cash flows on our AFS debt securities are recognized currently as an increase to the allowance for credit losses. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.
Convertible Senior Notes
Effective January 1, 2021, the Company early adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which removes certain separation models for convertible debt instruments and convertible preferred stock that require the separation into a debt component and an equity or derivative component. Consequently, our convertible senior notes (the “Convertible Notes”), which were previously accounted for as having separate liability and equity components, are now accounted for as a single liability measured at amortized cost. The standard was adopted using the modified restrospective method of transition, which resulted in a cumulative decrease to additional paid-in capital of $3.7 million, partially offset by a cumulative decrease to accumulated deficit of $2.2 million as of January 1, 2021.
Revenue Recognition
Interest Income
Interest income on performing loans and financial instruments is accrued based on the outstanding principal amount and contractual terms of the instrument. For loans where we do not elect the fair value option, origination fees and direct loan origination costs are also recognized in interest income over the loan term as a yield adjustment using the effective interest method. When we elect the fair value option, origination fees and direct loan costs are recorded directly in income and are not deferred. Discounts or premiums associated with the purchase of non-performing loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on expected cash flows through the expected maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections.
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We cease accruing interest on non-performing loans at the earlier of (i) the loan becoming significantly past due or (ii) management concluding that a full recovery of all interest and principal is doubtful. Interest income on non-accrual loans in which management expects a full recovery of the loan’s outstanding principal balance is only recognized when received in cash. If a full recovery of principal is doubtful, the cost recovery method is applied whereby any cash received is applied to the outstanding principal balance of the loan. A non-accrual loan is returned to accrual status at such time as the loan becomes contractually current and management believes all future principal and interest will be received according to the contractual loan terms.
For loans acquired with deteriorated credit quality, interest income is only recognized to the extent that our estimate of undiscounted expected principal and interest exceeds our investment in the loan. Such excess, if any, is recognized as interest income on a level-yield basis over the life of the loan.
Upon the sale of loans or securities which are not accounted for pursuant to the fair value option, the excess (or deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain (loss).
Servicing Fees
We typically seek to be the special servicer on CMBS transactions in which we invest. When we are appointed to serve in this capacity, we earn special servicing fees from the related activities performed, which consist primarily of overseeing the workout of under-performing and non-performing loans underlying the CMBS transactions. These fees are recognized in income in the period in which the services are performed and the revenue recognition criteria have been met.
Rental Income
Rental income is recognized when earned from tenants. For leases that provide rent concessions or fixed escalations over the lease term, rental income is recognized on a straight-line basis over the noncancelable term of the lease. In net lease arrangements, costs reimbursable from tenants are recognized in rental income in the period in which the related expenses are incurred as we are generally the primary obligor with respect to purchasing goods and services for property operations. In instances where the tenant is responsible for property maintenance and repairs and contracts and settles such costs directly with third party service providers, we do not reflect those expenses in our consolidated statement of operations as the tenant is the primary obligor.
Earnings Per Share
We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) shares contingently issuable to our Manager, (iii) the conversion options associated with our Convertible Notes (see Notes 10 and 17) and (iv) non-controlling interests that are redeemable with our common stock (see Note 16). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.
Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities. In addition, the non-controlling interests that are redeemable with our common stock are considered participating securities because they earn a preferred return indexed to the dividend rate on our common stock (see Note 16). Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities. For the three months ended March 31, 2021 and 2020, the two-class method resulted in the most dilutive EPS calculation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our investments, which has a significant impact on the amount of income that we record and/or disclose. 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.
The outbreak of COVID-19 beginning in the first quarter of 2020 has had, and is expected to continue to have, an adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2021. However, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.
Recent Accounting Developments
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and on January 11, 2021, issued ASU 2021-01, Reference Rate Reform (Topic 848) – Scope, both of which provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. These ASUs are effective through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through March 31, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
3. Acquisitions and Divestitures
During the three months ended March 31, 2021, we sold an operating property within the Commercial and Residential Lending Segment relating to a grocery distribution facility located in Montgomery, Alabama that was previously acquired in March 2019 through foreclosure of a loan with a carrying value of $9.0 million ($20.9 million unpaid principal balance net of an $8.3 million allowance and $3.6 million of unamortized discount) at the foreclosure date. The operating property was sold for $30.6 million and we recognized a gain of $17.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.
During the three months ended March 31, 2021 and 2020, we had no significant acquisitions of properties or businesses.
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 for either. The following tables summarize our investments in mortgages and loans as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Weighted
Average Life
Carrying
Face
Average
(“WAL”)
Coupon (1)
(years)(2)
Loans held-for-investment:
Commercial loans:
First mortgages (3), (8)
9,955,674
10,003,057
5.1
%
1.7
Subordinated mortgages (4)
70,457
71,428
8.8
2.5
Mezzanine loans (3)
603,119
601,080
10.1
1.4
18,200
20,267
8.2
2.6
Total commercial loans
10,647,450
10,695,832
Infrastructure first priority loans (5)
1,595,615
1,616,716
4.3
4.1
Residential loans, fair value option (6)
150,712
149,404
6.2
N/A
(7)
Total loans held-for-investment
12,393,777
12,461,952
Loans held-for-sale:
Residential, fair value option (6)
444,835
435,025
5.7
Commercial, $168,226 under fair value option (8)
310,428
314,917
Infrastructure, lower of cost or fair value (5)
89,368
89,601
2.9
Total loans held-for-sale
839,543
Total gross loans
13,238,408
13,301,495
Credit loss allowances:
Commercial loans held-for-investment
(63,477)
Infrastructure loans held-for-investment
(8,807)
Total allowances
(72,284)
Total net loans
13,166,124
First mortgages (3)
8,931,772
8,978,373
5.3
1.5
71,185
72,257
2.8
620,319
619,352
1.6
30,284
33,626
8.9
1.8
9,653,560
9,703,608
Infrastructure first priority loans
1,420,273
1,439,940
4.4
Residential loans, fair value option
90,684
86,796
6.0
11,164,517
11,230,344
Residential, fair value option
841,963
820,807
Commercial, fair value option
90,332
90,789
3.9
10.0
Infrastructure, lower of cost or fair value
120,540
120,900
3.1
3.2
1,032,496
12,217,352
12,262,840
(69,611)
(7,833)
(77,444)
12,139,908
As of March 31, 2021, our variable rate loans held-for-investment were as follows (dollars in thousands):
Weighted-average
Spread Above Index
Commercial loans
9,969,387
Infrastructure loans
3.8
Total variable rate loans held-for-investment
11,565,002
4.2
Credit Loss Allowances
As discussed in Note 2, we do not have a history of realized credit losses on our HFI loans and HTM securities, so we have subscribed to third party database services to provide us with industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios.
For our commercial loans, we utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading CMBS data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-stabilized-value (“LTV”) and debt service coverage ratio (DSCR) metrics, as well as principal balances, property type, location, coupon, origination year, term, subordination, expected repayment dates and future fundings. We also select from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our commercial loans, as set forth in the credit quality indicator table below. A lower LTV ratio typically indicates a lower credit loss risk.
The macroeconomic forecasts do not differentiate among property types or asset classes. Instead, these forecasts reference general macroeconomic growth factors which apply broadly across all assets. However, the COVID-19 pandemic has had a more negative impact on certain property types, principally retail and hospitality, which have
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withstood extended government mandated closures, and more recently office, which is experiencing lower demand due to remote working arrangements. The broad macroeconomic forecasts do not account for such differentiation. Accordingly, we have selected a more adverse macroeconomic recovery forecast related to these property types in determining our credit loss allowance.
For our infrastructure loans, we utilize a database of historical infrastructure loan performance that is shared among a consortium of banks and other lenders and compiled by a major bond credit rating agency. The database is representative of industry-wide project finance activity dating back to 1983. We derive historical loss rates from the database filtered by industry, sub-industry, term and construction status for each of our infrastructure loans. Those historical loss rates reflect global economic cycles over a long period of time as well as average recovery rates. We categorize the results between the power and oil and gas industries, which we consider the most significant indicator of credit quality for our infrastructure loans, as set forth in the credit quality indicator table below.
As discussed in Note 2, we use a discounted cash flow or collateral value approach, rather than the industry loan loss approach described above, to determine credit loss allowances for any credit deteriorated loans.
We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan and/or (iii) the collateral’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the collateral. In addition, we consider the overall economic environment, real estate or industry sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.
The significant credit quality indicators for our loans measured at amortized cost, which excludes loans held-for-sale, were as follows as of March 31, 2021 (dollars in thousands):
Term Loans
Revolving Loans
Credit
Amortized Cost Basis by Origination Year
Amortized Cost
Amortized
Loss
2019
2018
2017
Prior
Cost Basis
Allowance
Credit quality indicator:
LTV < 60%
1,152,309
709,735
1,314,912
1,225,605
729,227
425,570
5,557,358
7,015
LTV 60% - 70%
859,035
480,542
1,530,002
825,212
39,916
82,088
3,816,795
31,535
LTV > 70%
240,217
599,518
312,972
61,426
1,214,133
16,661
Credit deteriorated
28,986
11,977
40,963
8,266
Defeased and other
18,201
Total commercial
2,011,344
1,430,494
3,444,432
2,392,775
769,143
599,262
63,477
Infrastructure loans:
Power
77,525
220,901
397,619
124,959
371,072
10,057
1,202,133
5,074
Oil and gas
19,902
267,727
100,803
5,050
393,482
3,733
Total infrastructure
97,427
488,628
498,422
15,107
8,807
Residential loans held-for-investment, fair value option
Loans held-for-sale
72,284
As of March 31, 2021, we had credit deteriorated commercial loans with an amortized cost basis of $41.0 million, of which $29.0 million had no credit loss allowance. These loans were on nonaccrual status, with the cost recovery method of interest income recognition applied. In addition to these credit deteriorated loans, we had a $187.6 million commercial loan and $20.2 million of residential loans that were 90 days or greater past due at March 31, 2021. In March 2021, $7.3 million relating to the $187.6 million commercial loan that was 90 days or greater past due was converted to equity interests pursuant to a consensual transfer under pre-existing equity pledges of additional collateral (see Note 7). The $187.6 million commercial loan, along with a $14.8 million infrastructure loan in forbearance, were placed on nonaccrual status during the three months ended March 31, 2021, but are not considered credit deteriorated as we presently expect to recover all amounts due. Any loans which are modified to provide for the deferral of interest are not considered past due and are accounted for in accordance with our revenue recognition policy on interest income.
The following tables present the activity in our credit loss allowance for funded loans and unfunded commitments (amounts in thousands):
Funded Commitments Credit Loss Allowance
Three Months Ended March 31, 2021
Commercial
Infrastructure
Funded Loans
Credit loss allowance at December 31, 2020
69,611
7,833
77,444
Credit loss provision (reversal), net
1,880
717
2,597
Charge-offs
(7,757)
(1)
Recoveries
Transfers
(257)
257
Credit loss allowance at March 31, 2021
Unfunded Commitments Credit Loss Allowance (2)
5,258
812
6,070
Credit loss reversal, net
(2,122)
(143)
(2,265)
3,136
669
3,805
Memo: Unfunded commitments as of March 31, 2021 (3)
1,291,304
65,791
1,357,095
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Loan Portfolio Activity
The activity in our loan portfolio was as follows (amounts in thousands):
Held-for-Investment Loans
Residential
Held-for-Sale Loans
Total Loans
Balance at December 31, 2020
9,583,949
1,412,440
Acquisitions/originations/additional funding
2,196,813
99,311
375,270
2,671,394
Capitalized interest (1)
36,646
Basis of loans sold (2)
(571,927)
Loan maturities/principal repayments
(1,021,393)
(18,055)
(9,210)
(44,326)
(1,092,984)
Discount accretion/premium amortization
15,824
921
16,745
Changes in fair value
(290)
(9,188)
Unrealized foreign currency translation loss
(14,082)
(181)
(14,263)
(1,880)
(717)
(2,597)
Transfer to/from other asset classifications or between segments
(211,904)
93,089
69,528
41,967
(7,320)
Balance at March 31, 2021
10,583,973
1,586,808
Three Months Ended March 31, 2020
Balance at December 31, 2019
8,517,054
1,397,448
671,572
884,150
11,470,224
Cumulative effect of ASC 326 effective January 1, 2020
(10,112)
(10,328)
(20,440)
1,089,096
62,929
100,720
646,160
1,898,905
36,072
(604)
(789,259)
(789,863)
(689,972)
(37,051)
(48,620)
(20,680)
(796,323)
11,559
411
110
12,080
(25,619)
9,485
(83,263)
(4,056)
(87,319)
(37,527)
(5,805)
(43,332)
Transfer to/from other asset classifications
(26,333)
(422,691)
449,024
Balance at March 31, 2020
8,832,907
1,381,271
274,758
1,174,934
11,663,870
(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.
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5. Investment Securities
Investment securities were comprised of the following as of March 31, 2021 and December 31, 2020 (amounts in thousands):
Carrying Value as of
RMBS, available-for-sale
160,301
167,349
RMBS, fair value option (1)
249,005
235,997
CMBS, fair value option (1), (2)
1,202,883
1,209,030
HTM debt securities, amortized cost net of credit loss allowance of $5,387 and $5,675
488,075
538,605
Equity security, fair value
10,655
11,247
Subtotal—Investment securities
2,110,919
2,162,228
VIE eliminations (1)
(1,432,632)
(1,425,570)
Total investment securities
Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):
RMBS,
RMBS, fair
CMBS, fair
HTM
Securitization
available-for-sale
value option
Securities
VIEs (1)
Purchases
27,333
(27,333)
Sales
(11,604)
Principal collections
7,251
13,344
1,710
51,690
(14,481)
Purchases/fundings
29,292
7,661
5,729
32,316
(24,376)
6,549
8,572
16,523
6,638
(24,723)
RMBS, Available-for-Sale
The Company classified all of its RMBS not eliminated in consolidation as available-for-sale as of March 31, 2021 and December 31, 2020. 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, 2021 and December 31, 2020 (amounts in thousands):
Unrealized Gains or (Losses)
Recognized in AOCI
Gross
Net
Unrealized
Fair Value
Cost
Basis
Gains
Losses
Adjustment
RMBS
118,647
41,688
(34)
123,292
44,123
(66)
44,057
Weighted Average Coupon (1)
WAL (Years) (2)
1.2
5.9
As of March 31, 2021, approximately $139.4 million, or 87.0%, of RMBS were variable rate. We purchased all of the RMBS at a discount, a portion of which is accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of this accretable discount.
We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.3 million and $0.4 million for the three months ended March 31, 2021 and 2020, respectively, 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, 2021 and December 31, 2020, and for which an allowance for credit losses has not been recorded (amounts in thousands):
Estimated Fair Value
Unrealized Losses
Securities with a
loss less than
loss greater than
12 months
1,170
As of December 31, 2020
438
1,195
(25)
(41)
As of March 31, 2021 and December 31, 2020, there were one and two securities, respectively, with unrealized losses reflected in the table above. After evaluating the securities and recording adjustments for credit losses, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses are calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) our net amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or credit losses could be materially different from what is currently projected and/or reported.
25
CMBS and RMBS, Fair Value Option
As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for certain CMBS and RMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of March 31, 2021, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $1.2 billion and $2.7 billion, respectively. As of March 31, 2021, the fair value and unpaid principal balance of RMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $249.0 million and $160.1 million, respectively. The $1.5 billion total fair value balance of CMBS and RMBS represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value (all except $19.3 million at March 31, 2021) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option investment securities.
As of March 31, 2021, $96.9 million of our CMBS were variable rate and none of our RMBS were variable rate.
HTM Debt Securities, Amortized Cost
The table below summarizes our investments in HTM debt securities as of March 31, 2021 and December 31, 2020 (amounts in thousands):
Credit Loss
Net Carrying
Gross Unrealized
Holding Gains
Holding Losses
CMBS
339,120
(25,169)
313,951
Preferred interests
116,466
(2,462)
114,004
3,346
117,350
Infrastructure bonds
37,876
(2,925)
34,951
435
35,386
493,462
(5,387)
3,781
466,687
339,059
(23,286)
315,773
166,614
(2,749)
163,865
432
(913)
163,384
38,607
(2,926)
35,681
415
36,096
544,280
(5,675)
847
(24,199)
515,253
The following table presents the activity in our credit loss allowance for HTM debt securities (amounts in thousands):
Total HTM
Preferred
Bonds
2,749
2,926
5,675
(287)
(288)
2,462
2,925
5,387
The table below summarizes the maturities of our HTM debt securities by type as of March 31, 2021 (amounts in thousands):
Less than one year
313,863
One to three years
25,257
139,261
Three to five years
Thereafter
26
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. The fair value of the investment remeasured in USD was $10.7 million and $11.2 million as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, our shares represent an approximate 2% interest in SEREF.
6. Properties
Our properties are held within the following portfolios:
Woodstar I Portfolio
The Woodstar I Portfolio is comprised of 32 affordable housing communities with 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas. During the year ended December 31, 2015, we acquired 18 of the 32 affordable housing communities of the Woodstar I Portfolio with the final 14 communities acquired during the year ended December 31, 2016. The Woodstar I Portfolio includes total gross properties and lease intangibles of $636.7 million and debt of $572.8 million as of March 31, 2021.
Woodstar II Portfolio
The Woodstar II Portfolio is comprised of 27 affordable housing communities with 6,109 units concentrated primarily in Central and South Florida. We acquired eight of the 27 affordable housing communities in December 2017, with the final 19 communities acquired during the year ended December 31, 2018. The Woodstar II Portfolio includes total gross properties and lease intangibles of $610.6 million and debt of $512.6 million as of March 31, 2021.
Medical Office Portfolio
The Medical Office Portfolio is comprised of 34 medical office buildings acquired during the year ended December 31, 2016. These properties, which collectively comprise 1.9 million square feet, are geographically dispersed throughout the U.S. and primarily affiliated with major hospitals or located on or adjacent to major hospital campuses. The Medical Office Portfolio includes total gross properties and lease intangibles of $760.3 million and debt of $592.9 million as of March 31, 2021.
Master Lease Portfolio
The Master Lease Portfolio is comprised of 16 retail properties geographically dispersed throughout the U.S., with more than 50% of the portfolio, by carrying value, located in Florida, Texas and Minnesota. These properties, which we acquired in September 2017, collectively comprise 1.9 million square feet and were leased back to the seller under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations. The Master Lease Portfolio includes total gross properties of $343.8 million and debt of $192.8 million as of March 31, 2021.
Investing and Servicing Segment Property Portfolio
The Investing and Servicing Segment Property Portfolio (“REIS Equity Portfolio”) is comprised of 15 commercial real estate properties and one equity interest in an unconsolidated commercial real estate property which were acquired from CMBS trusts during the previous five years. The REIS Equity Portfolio includes total gross properties and lease intangibles of $270.4 million and debt of $192.6 million as of March 31, 2021.
The table below summarizes our properties held as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Depreciable Life
Property Segment
Land and land improvements
0 – 15 years
485,026
484,846
Buildings and building improvements
5 – 45 years
1,691,423
1,690,701
Furniture & fixtures
3 – 7 years
60,926
59,632
Investing and Servicing Segment
50,617
50,585
3 – 40 years
179,813
179,014
2 – 5 years
2,804
2,606
Commercial and Residential Lending Segment (1)
0 – 7 years
9,691
11,416
10 – 20 years
9,927
19,251
Construction in progress
75,245
Properties, cost
2,565,472
2,573,296
Less: accumulated depreciation
(320,724)
(302,143)
During the three months ended March 31, 2021, we sold an operating property within the Commercial and Residential Lending Segment for $30.6 million and recognized a gain of $17.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. Refer to Note 3 for further discussion. No operating properties were sold during the three months ended March 31, 2020.
28
7. Investment in Unconsolidated Entities
The table below summarizes our investments in unconsolidated entities as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Participation /
Carrying value as of
Ownership % (1)
Equity method investments:
Equity interest in a natural gas power plant
10%
24,840
25,095
Investor entity which owns equity in an online real estate company
50%
9,573
9,397
Equity interests in commercial real estate
1,368
1,543
Equity interest in and advances to a residential mortgage originator (2)
18,458
17,852
Various (3)
15% - 50%
16,896
8,831
71,135
62,718
Other equity investments:
Equity interest in a servicing and advisory business
2%
17,584
Investment funds which own equity in a loan servicer and other real estate assets
4% - 6%
7,267
Various, including Federal Home Loan Bank stock
0% - 2%
4,921
20,485
29,772
45,336
As of March 31, 2021, the carrying value of our equity investment in a residential mortgage originator exceeded the underlying equity in net assets of such investee by $1.6 million. This difference is the result of the Company recording its investment in the investee at its acquisition date fair value, which included certain non-amortizing intangible assets not recognized by the investee. Should the Company determine these intangible assets held by the investee are impaired, the Company will recognize such impairment loss through earnings from unconsolidated entities in our consolidated statement of operations, otherwise, such difference between the carrying value of our equity investment in the residential mortgage originator and the underlying equity in the net assets of the residential mortgage originator will continue to exist.
Other than our equity interest in the residential mortgage originator, there were no differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of March 31, 2021.
During the three months ended March 31, 2021, we did not become aware of (i) any observable price changes in our other equity investments accounted for under the fair value practicability election or (ii) any indicators of impairment.
8. Goodwill and Intangibles
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Management considered the general economic decline and the impact of the COVID-19 pandemic, but did not identify any such event or circumstances. However, future changes in the expectations of the impact of COVID-19 on our operations, financial performance and cash flows could cause our goodwill to be impaired.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s goodwill of $119.4 million at both March 31, 2021 and December 31, 2020 represents the excess of consideration transferred over the fair value of net assets acquired on September 19, 2018 and October 15, 2018. The goodwill recognized is attributable to value embedded in the acquired Infrastructure Lending Segment’s lending platform.
LNR Property LLC (“LNR”)
The Investing and Servicing Segment’s goodwill of $140.4 million at both March 31, 2021 and December 31, 2020 represents the excess of consideration transferred over the fair value of net assets of LNR acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes a network of commercial real estate asset managers, work-out specialists, underwriters and administrative support professionals as well as proprietary historical performance data on commercial real estate assets.
Intangible Assets
Servicing Rights Intangibles
In connection with the LNR acquisition, we identified domestic servicing rights that existed at the purchase date, based upon the expected future cash flows of the associated servicing contracts. As of March 31, 2021 and December 31, 2020, the balance of the domestic servicing intangible was net of $42.9 million and $41.4 million, respectively, which was eliminated in consolidation pursuant to ASC 810 against VIE assets in connection with our consolidation of securitization VIEs. Before VIE consolidation, as of March 31, 2021 and December 31, 2020, the domestic servicing intangible had a balance of $55.3 million and $54.6 million, respectively, which represents our economic interest in this asset.
Lease Intangibles
In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and favorable lease intangible assets associated with certain non-cancelable operating leases of the acquired properties.
The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of March 31, 2021 and December 31, 2020 (amounts in thousands):
Gross Carrying
Amortization
Domestic servicing rights, at fair value
12,406
13,202
In-place lease intangible assets
133,203
(94,726)
38,477
(92,540)
40,663
Favorable lease intangible assets
24,181
(8,292)
15,889
(7,929)
16,252
Total net intangible assets
169,790
(103,018)
170,586
(100,469)
The following table summarizes the activity within intangible assets for the three months ended March 31, 2021 (amounts in thousands):
Domestic
In-place Lease
Favorable Lease
Servicing
Intangible
Rights
Assets
Balance as of January 1, 2021
(2,186)
(363)
(2,549)
Changes in fair value due to changes in inputs and assumptions
Balance as of March 31, 2021
The following table sets forth the estimated aggregate amortization of our in-place lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):
2021 (remainder of)
7,094
2022
7,862
2023
6,115
2024
4,722
2025
3,846
24,727
54,366
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9. Secured Borrowings
Secured Financing Agreements
The following table is a summary of our secured financing agreements in place as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Outstanding Balance at
Current
Extended
Weighted Average
Pledged Asset
Maximum
December 31,
Maturity
Maturity (a)
Pricing
Carrying Value
Facility Size
Repurchase Agreements:
Commercial Loans
May 2021 to Aug 2025
(b)
May 2023 to Mar 2029
(c)
8,088,081
9,164,525
(d)
5,592,652
4,878,939
Residential Loans
Jan 2022 to Oct 2023
LIBOR + 2.09%
428,877
1,750,000
328,620
22,590
Infrastructure Loans
Feb 2022
LIBOR + 2.00%
295,516
500,000
246,136
232,961
Conduit Loans
Feb 2022 to Jun 2023
Feb 2023 to Jun 2024
LIBOR + 2.15%
147,523
350,000
111,087
53,554
CMBS/RMBS
Dec 2021 to Oct 2030
(e)
Mar 2022 to Apr 2031
(f)
1,112,819
823,365
668,993
(g)
620,763
Total Repurchase Agreements
10,072,816
12,587,890
6,947,488
5,808,807
Other Secured Financing:
Borrowing Base Facility
Apr 2022
Apr 2024
LIBOR + 2.25%
304,076
650,000
(h)
223,302
43,014
Commercial Financing Facility
Mar 2022
Mar 2029
GBP LIBOR + 1.75%
101,559
81,847
81,218
Residential Financing Facility
Sep 2022
Sep 2025
3.50%
163,545
250,000
1,515
215,024
Infrastructure Acquisition Facility
Sep 2021
(i)
525,611
517,498
414,503
467,450
Infrastructure Financing Facilities
Jul 2022 to Oct 2022
Oct 2024 to Jul 2027
LIBOR + 2.04%
699,684
1,250,000
548,956
538,645
Property Mortgages - Fixed rate
Nov 2024 to Aug 2052
(j)
4.03%
1,271,385
1,155,306
1,077,528
Property Mortgages - Variable rate
Nov 2021 to Jul 2030
(k)
929,800
985,453
960,901
960,903
Term Loan and Revolver
(l)
763,375
643,375
645,000
Federal Home Loan Bank
396,000
Total Other Secured Financing
3,995,660
5,653,479
4,029,705
4,424,782
14,068,476
18,241,369
10,977,193
10,233,589
Unamortized net discount
(13,149)
(13,569)
Unamortized deferred financing costs
(68,112)
(73,830)
In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.
In January 2021, we entered into a Residential Loans repurchase facility to finance residential loans. The facility carries a one-year term, which we intend to extend every three months, and an annual interest rate of one-month LIBOR + 2.00% to 2.50%, subject to a 25 bps LIBOR floor. The maximum facility size was initially $375.0 million and was increased to $1.0 billion in March 2021.
In March 2021, we entered into mortgage loans with total borrowings of $82.9 million to refinance our Woodstar II Portfolio. The loans carry seven-year terms and a weighted average fixed annual interest rate of 4.36%. A portion of the net proceeds from the mortgage loans was used to repay $4.9 million of outstanding government sponsored mortgage loans.
Our secured financing agreements contain certain financial tests and covenants. As of March 31, 2021, we were in compliance with all such covenants.
We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the majority of our repurchase facilities, consisting of 72% 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 the 28% of repurchase agreements containing margin call provisions for general capital markets activity, approximately 15% 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 agreement.
For the three months ended March 31, 2021 and 2020, approximately $9.5 million and $8.8 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.
Collateralized Loan Obligations
In August 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2019-FL1. On the closing date, the CLO issued $1.1 billion principal amount of notes, of which $936.4 million was purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the three months ended March 31, 2021, we utilized the reinvestment feature, contributing $98.6 million of additional interests into the CLO.
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The following table is a summary of our CLO as of March 31, 2021 and December 31, 2020 (amounts in thousands):
Count
Average Spread
Collateral assets
1,099,693
1,099,639
LIBOR + 4.21%
(a)
May 2024
Financing
936,375
LIBOR + 1.63%
July 2038
1,002,445
1,099,439
LIBOR + 3.93%
LIBOR + 1.64%
We incurred $9.2 million of issuance costs in connection with the CLO, which are amortized on an effective yield basis over the estimated life of the CLO. For both the three months ended March 31, 2021 and 2020, approximately $0.6 million of amortization of deferred financing costs was included in interest expense on our condensed consolidated statements of operations. As of March 31, 2021 and December 31, 2020, our unamortized issuance costs were $5.2 million and $5.8 million, respectively.
The CLO is considered a VIE, for which we are deemed the primary beneficiary. We therefore consolidate the CLO. Refer to Note 14 for further discussion.
Maturities
Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The following table sets forth our principal repayments schedule for secured financings based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):
Repurchase
Other Secured
Agreements
CLO
302,200
58,768
360,968
1,548,791
419,128
1,967,919
1,450,262
803,315
2,253,577
1,480,044
475,383
1,955,427
1,510,607
248,376
1,758,983
655,584
2,024,735
3,616,694
11,913,568
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10. Unsecured Senior Notes
The following table is a summary of our unsecured senior notes outstanding as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Remaining
Coupon
Effective
Period of
Carrying Value at
Rate
Rate (1)
Date
2021 Senior Notes
5.00
5.32
12/15/2021
0.7
years
700,000
2023 Senior Notes
5.50
5.71
11/1/2023
300,000
2023 Convertible Notes
4.38
4.57
4/1/2023
2.0
2025 Senior Notes
4.75
(2)
5.04
3/15/2025
4.0
Total principal amount
Unamortized discount—Convertible Notes
(910)
(2,559)
Unamortized discount—Senior Notes
(8,356)
(9,332)
(5,076)
(5,589)
Carrying amount of debt components
Carrying amount of conversion option equity components recorded in additional paid-in capital for outstanding convertible notes
3,755
Our unsecured senior notes contain certain financial tests and covenants. As of March 31, 2021, we were in compliance with all such covenants.
On March 29, 2017, we issued $250.0 million of 4.375% Convertible Senior Notes due 2023 (the “2023 Convertible Notes”) which remain outstanding at March 31, 2021 and mature on April 1, 2023.
We recognized interest expense of $2.9 million and $3.0 million during the three months ended March 31, 2021 and 2020, respectively, from our Convertible Notes.
The following table details the conversion attributes of our Convertible Notes outstanding as of March 31, 2021 (amounts in thousands, except rates):
Conversion
Price (2)
38.5959
25.91
The if-converted value of the 2023 Convertible Notes was less than their principal amount by $11.3 million at March 31, 2021 as the closing market price of the Company’s common stock of $24.74 was less than the implicit conversion price of $25.91 per share. The if-converted value of the principal amount of the 2023 Convertible Notes was $238.7 million as of March 31, 2021. As of March 31, 2021, the net carrying amount and fair value of the 2023 Convertible Notes was $248.6 million and $255.8 million, respectively.
Upon conversion of the 2023 Convertible Notes, settlement may be made in common stock, cash or a combination of both, at the option of the Company.
Conditions for Conversion
Prior to October 1, 2022, the 2023 Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is at least 110% of the conversion price of the 2023 Convertible Notes for at least 20 out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the 2023 Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10% or (4) certain other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.
On or after October 1, 2022, holders of the 2023 Convertible Notes may convert each of their notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.
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.
Loan Securitizations
Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in part by these assets, as well as other assets transferred to the VIE by third parties. Within the Commercial and Residential Lending Segment, we acquire residential loans with the intent to sell these mortgage loans to VIEs for the purpose of securitization. These VIEs then issue RMBS that are collateralized by these assets.
In certain instances, we retain an interest in the CMBS or RMBS VIE and serve as special servicer or servicing administrator for the VIE. In these circumstances, we generally consolidate the VIE into which the loans were sold. The securitizations are subject to optional redemption after a certain period of time or when the pool balance falls below a specified threshold.
The following summarizes the face amount and proceeds of commercial and residential loans securitized for the three months ended March 31, 2021 and 2020 (amounts in thousands):
Face Amount
Proceeds
For the Three Months Ended March 31,
85,037
89,710
383,549
389,798
335,835
352,393
381,279
398,747
The securitization of these commercial and residential loans does not result in a discrete gain or loss since they are carried under the fair value option.
Our securitizations have each been structured as bankruptcy-remote entities whose assets are not intended to be available to the creditors of any other party.
Commercial and Residential Loan Sales
Within the Commercial and Residential Lending Segment, we originate or acquire commercial mortgage loans, subsequently selling all or a portion thereof. Typically, our motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will retain and hold for investment. We also may sell certain of our previously-acquired residential loans to third parties outside a securitization. The following table summarizes our loans sold by the Commercial and Residential Lending Segment, net of expenses (amounts in thousands):
89,418
92,419
550
604
There were no sales of commercial loans within the Commercial and Residential Lending Segment during the three months ended March 31, 2021 and 2020.
Infrastructure Loan Sales
During the three months ended March 31, 2020, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of $38.7 million for proceeds of $38.4 million, recognizing gains of $0.3 million. There were no sales of loans within the Infrastructure Lending Segment during the three months ended March 31, 2021.
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
The Company does not generally elect to apply the hedge accounting designation to its hedging instruments. As of March 31, 2021 and December 31, 2020, the Company did not have any designated hedges.
Non-designated Hedges and Derivatives
We have entered into the following types of non-designated hedges and derivatives:
The following table summarizes our non-designated derivatives as of March 31, 2021 (notional amounts in thousands):
Type of Derivative
Number of Contracts
Aggregate Notional Amount
Notional Currency
Fx contracts – Buy Euros ("EUR")
3,973
EUR
November 2022
Fx contracts – Buy Pounds Sterling ("GBP")
16,675
GBP
April 2021 – July 2022
Fx contracts – Sell EUR
208
252,796
April 2021 – November 2025
Fx contracts – Sell GBP
156
556,798
April 2021 – May 2024
Fx contracts – Sell Australian dollar ("AUD")
188,554
AUD
August 2021 – June 2022
Interest rate swaps – Paying fixed rates
1,791,332
USD
May 2023 – April 2031
Interest rate swaps – Receiving fixed rates
470,000
March 2025
Interest rate caps
985,635
April 2021 – April 2025
Credit index instruments
49,000
September 2058 – August 2061
Interest rate swap guarantees
371,890
March 2022 – June 2025
471
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, 2021 and December 31, 2020 (amounts in thousands):
Fair Value of Derivatives
in an Asset Position (1) as of
in a Liability Position (2) as of
Interest rate contracts
25,331
33,841
498
849
Foreign exchange contracts
12,617
6,585
34,002
39,951
81
129
301
520
Total derivatives
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 (amounts in thousands):
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
Gain on derivative financial instruments
20,158
(45,125)
351
(675)
13,602
53,265
(122)
2,245
38
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
Offset in the
Presented in
Collateral
Statement of
the Statement of
Financial
Received /
(v) = (iii) - (iv)
Recognized
Financial Position
Instruments
Pledged
Net Amount
11,491
24,235
2,303
22,618
696
Repurchase agreements
6,982,293
6,958,979
6,716
33,772
67
27,416
7,192
5,850,131
5,815,523
14. Variable Interest Entities
As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation, including our investments in CMBS, RMBS and our retained interests in securitization transactions we initiated, all of which are generally considered to be variable interests in VIEs.
Securitization VIEs consolidated in accordance with ASC 810 are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The assets and other instruments held by these securitization entities are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated entities, nor to us as the primary beneficiary. The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, a portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.
VIEs in which we are the Primary Beneficiary
The inclusion of the assets and liabilities of securitization VIEs in which we are deemed the primary beneficiary has no economic effect on us. Our exposure to the obligations of securitization VIEs is generally limited to our investment in these entities. We are not obligated to provide, nor have we provided, any financial support for any of these consolidated structures.
During the year ended December 31, 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, which is considered to be a VIE. We are the primary beneficiary of, and therefore consolidate, the CLO in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager that most significantly impact the CLO’s economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the CLO that could be potentially significant through the subordinate interests we own.
The following table details the assets and liabilities of our consolidated CLO as of March 31, 2021 and December 31, 2020 (amounts in thousands):
96,998
Loans held-for-investment
1,002,441
4,068
5,454
307
557
1,104,014
1,105,450
Liabilities
640
663
931,818
931,217
Assets held by this CLO are restricted and can be used only to settle obligations of the CLO, including the subordinate interests owned by us. The liabilities of this CLO are non-recourse to us and can only be satisfied from the assets of the CLO.
We also hold controlling interests in other non-securitization entities that are considered VIEs. SPT Dolphin Intermediate LLC (“SPT Dolphin”), the entity which holds the Woodstar II Portfolio, is a VIE because the third party interest holders do not carry kick-out rights or substantive participating rights. We were deemed to be the primary beneficiary of the VIE because we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and a significant economic interest in the entity. This VIE had total assets of $685.4 million and liabilities of $520.6 million as of March 31, 2021.
We also hold a 51% controlling interest in a joint venture (the “CMBS JV”) within our Investing and Servicing Segment, which is considered a VIE because the third party interest holder does not carry kick-out rights or substantive participating rights. We are deemed the primary beneficiary of the CMBS JV. This VIE had total assets of $335.4 million and liabilities of $78.9 million as of March 31, 2021. Refer to Note 16 for further discussion.
In addition to the above non-securitization entities, we have smaller VIEs with total assets of $98.7 million and liabilities of $53.8 million as of March 31, 2021.
VIEs in which we are not the Primary Beneficiary
In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not appointed, or do not serve as, special servicer or servicing administrator or (ii) an unrelated third party has the rights to unilaterally remove us as special servicer without cause. In these instances, we do not have the power to direct activities that most significantly impact the VIE’s economic performance. In other cases, the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant. For these structures, we are not deemed to be the primary beneficiary of the VIE, and we do not consolidate these VIEs.
As of March 31, 2021, five of our six collateralized debt obligation (“CDO”) structures within our Investing and Servicing Segment were in default or imminent default, which, pursuant to the underlying indentures, changes the rights of the variable interest holders. Two of the five CDOs defaulted during the year ended December 31, 2020. 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, 2021, none of these five CDO structures were consolidated.
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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, 2021, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $19.3 million on a fair value basis.
As of March 31, 2021, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances, excluding the notional value of interest-only securities, of $3.9 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.
We also hold passive non-controlling interests in certain unconsolidated entities that are considered VIEs. We are not the primary beneficiaries of these VIEs as we do not possess the power to direct the activities of the VIEs that most significantly impact their economic performance and therefore report our interests, which totaled $25.7 million as of March 31, 2021, 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.
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.
Base Management Fee. For the three months ended March 31, 2021 and 2020, approximately $19.2 million and $19.1 million, respectively, was incurred for base management fees. As of both March 31, 2021 and December 31, 2020, there were $19.2 million of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.
Incentive Fee. For the three months ended March 31, 2021 and 2020, approximately $13.1 million and $15.8 million, respectively, was incurred for incentive fees. As of March 31, 2021 and December 31, 2020, there were $13.1 million and $15.0 million of unpaid incentive fees included in related-party payable in our condensed consolidated balance sheets.
Expense Reimbursement. For the three months ended March 31, 2021 and 2020, approximately $1.5 million and $2.2 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, 2021 and December 31, 2020, there were $3.8 million and $5.0 million, respectively, of unpaid reimbursable executive compensation and other expenses included in related-party payable in our condensed consolidated balance sheets.
Equity Awards. In certain instances, we issue RSAs to certain employees of affiliates of our Manager who perform services for us. During the three months ended March 31, 2021 and 2020, we granted 981,951 and 341,635 RSAs, respectively, at grant date fair values of $19.6 million and $3.9 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $2.4 million and $1.1 million during the three months ended March 31, 2021 and 2020, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. These shares generally vest over a three-year period.
Manager Equity Plan
In May 2017, the Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager Equity Plan (the “2017 Manager Equity Plan”), which replaced the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”). In November 2020, we granted 1,800,000 RSUs to our Manager under the 2017 Manager Equity Plan. In September 2019, we granted 1,200,000 RSUs to our Manager under the 2017 Manager Equity Plan. In April 2018, we granted 775,000 RSUs to our Manager under the 2017 Manager Equity Plan. In March 2017, we granted 1,000,000 RSUs to our Manager under the Manager Equity Plan. In connection with these grants and prior similar grants, we recognized share-based compensation expense of $5.9 million and $5.2 million within management fees in our condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively. Refer to Note 16 for further discussion of these grants.
Investments in Loans and Securities
During the three months ended March 31, 2021, the Company acquired $141.6 million of loans from a residential mortgage originator in which it holds an equity interest. Additionally, as of March 31, 2021, the Company had outstanding residential mortgage loan purchase commitments of $27.4 million to this residential mortgage originator. Refer to Note 7 for further discussion.
Lease Arrangements
In March 2020, we entered into an office lease agreement with an entity which is controlled by our Chairman and CEO through majority equity ownership of the entity. The leased premises are currently under construction and will serve as our new Miami Beach office when our existing lease in Miami Beach expires on December 31, 2021. The lease will commence after delivery of the office space to us, but no earlier than July 30, 2021. The lease is for approximately 74,000 square feet of office space, has an initial term of 15 years and requires monthly lease payments starting in the tenth month after lease commencement. The lease payments are based on an annual base rate of $52.00 per square foot that increases by 3% each anniversary following commencement, plus our pro rata share of building operating expenses. In April 2020, we provided a $1.9 million cash security deposit to the landlord. Prior to the execution of this lease, we engaged an independent third party leasing firm and external counsel to advise the independent directors of our board of directors on market terms for the lease. The terms of the lease were approved by our independent directors.
Other Related-Party Arrangements
Highmark Residential (“Highmark”), an affiliate of our Manager, provides property management services for the properties within our Woodstar I Portfolio. Fees paid to Highmark are calculated as a percentage of gross receipts and are at market terms. During the three months ended March 31, 2021 and 2020, property management fees to Highmark of $0.7 million and $0.5 million, respectively, were recognized in our condensed consolidated statements of operations.
Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.
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16. Stockholders’ Equity and Non-Controlling Interests
During the three months ended March 31, 2021, our board of directors declared the following dividends:
Declaration Date
Record Date
Ex-Dividend Date
Payment Date
Frequency
3/11/21
3/31/21
3/30/21
4/15/21
0.48
Quarterly
During the three months ended March 31, 2021 and 2020, there were no shares issued under our At-The-Market Equity Offering Sales Agreement. During the three months ended March 31, 2021 and 2020, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.
Equity Incentive Plans
In May 2017, the Company’s shareholders approved the 2017 Manager Equity Plan and the Starwood Property Trust, Inc. 2017 Equity Plan (the “2017 Equity Plan”), which allow for the issuance of up to 11,000,000 stock options, stock appreciation rights, RSAs, RSUs or other equity-based awards or any combination thereof to the Manager, directors, employees, consultants or any other party providing services to the Company. The 2017 Manager Equity Plan succeeds and replaces the Manager Equity Plan and the 2017 Equity Plan succeeds and replaces the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”) and the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (the “Non-Executive Director Stock Plan”).
The table below summarizes our share awards granted or vested under the Manager Equity Plan and the 2017 Manager Equity Plan during the three months ended March 31, 2021 and 2020 (dollar amounts in thousands):
Grant Date
Type
Amount Granted
Grant Date Fair Value
Vesting Period
November 2020
RSU
1,800,000
30,078
3 years
September 2019
1,200,000
29,484
April 2018
775,000
16,329
March 2017
1,000,000
22,240
Schedule of Non-Vested Shares and Share Equivalents
Manager
Grant Date Fair
Equity Plan
Value (per share)
1,594,605
2,286,896
3,881,501
17.26
Granted
1,518,072
21.81
Vested
(633,893)
(296,342)
(930,235)
17.48
2,478,784
1,990,554
4,469,338
18.76
As of March 31, 2021, there were 3.2 million shares of common stock available for future grants under the 2017 Manager Equity Plan and the 2017 Equity Plan.
Non-Controlling Interests in Consolidated Subsidiaries
In connection with our Woodstar II Portfolio acquisitions, we issued 10.2 million Class A Units in our consolidated subsidiary, SPT Dolphin, and rights to receive an additional 1.9 million Class A Units if certain contingent events occur. As of March 31, 2021, all of the 1.9 million contingent Class A Units were issued. The Class A Units are redeemable for consideration equal to the current share price of the Company’s common stock on a one-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the determination of the Company. During the three months ended March 31, 2021, redemptions of 0.1 million of the Class A Units were received and settled in common stock, leaving 10.6 million Class A Units outstanding as of March 31, 2021. In consolidation, the outstanding Class A Units are reflected as non-controlling interests in consolidated subsidiaries on our condensed consolidated balance sheets, the balance of which was $225.6 million and $226.7 million as of March 31, 2021 and December 31, 2020, respectively.
To the extent SPT Dolphin has sufficient cash available, the Class A Units earn a preferred return indexed to the dividend rate of the Company’s common stock. Any distributions made pursuant to this waterfall are recognized within net income attributable to non-controlling interests in our condensed consolidated statements of operations. During both the three months ended March 31, 2021 and 2020, we recognized net income attributable to non-controlling interests of $5.1 million associated with these Class A Units.
As discussed in Note 14, we hold a 51% controlling interest in the CMBS JV within our Investing and Servicing Segment. Because the CMBS JV is deemed a VIE for which we are the primary beneficiary, the 49% interest of our joint venture partner is reflected as a non-controlling interest in consolidated subsidiaries on our condensed consolidated balance sheets, and any net income attributable to this 49% joint venture interest is reflected within net income attributable to non-controlling interests in our consolidated statement of operations. The non-controlling interests in the CMBS JV were $132.4 million and $126.7 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021 and 2020, net income (loss) attributable to non-controlling interests was $5.4 million and $(6.0) million, respectively.
17. Earnings per Share
The following table provides a reconciliation of net income (loss) 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):
Basic Earnings (Loss)
Income (loss) attributable to STWD common stockholders
Less: Income attributable to participating shares not already deducted as non-controlling interests
(1,925)
(1,222)
Basic earnings (loss)
109,453
(67,991)
Diluted Earnings (Loss)
Add: Interest expense on Convertible Notes
2,916
*
Diluted earnings (loss)
112,369
Number of Shares:
Basic — Average shares outstanding
283,319
280,990
Effect of dilutive securities — Convertible Notes
9,649
Effect of dilutive securities — Contingently issuable shares
263
Diluted — Average shares outstanding
293,231
Earnings (Loss) Per Share Attributable to STWD Common Stockholders:
*Our Convertible Notes were not dilutive for the three months ended March 31, 2020.
As of March 31, 2021 and 2020, participating shares of 14.6 million and 13.2 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above. Such participating shares at both March 31, 2021 and 2020 included 10.6 million potential shares of our common stock issuable upon redemption of the Class A Units in SPT Dolphin, as discussed in Note 16.
18. Accumulated Other Comprehensive Income
The changes in AOCI by component are as follows (amounts in thousands):
Cumulative
Unrealized Gain
(Loss) on
Foreign
Available-for-
Currency
Sale Securities
Translation
Balance at January 1, 2021
(64)
OCI before reclassifications
Amounts reclassified from AOCI
Net period OCI
Balance at January 1, 2020
50,996
35,948
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.
Valuation Process
We have valuation control processes in place to validate the fair value of the Company’s financial assets and liabilities measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable.
Pricing Verification—We use recently executed transactions, other observable market data such as exchange data, broker/dealer quotes, third party pricing vendors and aggregation services for validating the fair values generated using valuation models. Pricing data provided by approved external sources is evaluated using a number of approaches; for example, by corroborating the external sources’ prices to executed trades, analyzing the methodology and assumptions used by the external source to generate a price and/or by evaluating how active the third party pricing source (or originating sources used by the third party pricing source) is in the market.
Unobservable Inputs—Where inputs are not observable, we review the appropriateness of the proposed valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs.
Any changes to the valuation methodology will be reviewed by our management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value could result in a different estimate of fair value at the reporting date.
Fair Value on a Recurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a recurring basis as follows:
Loans held-for-sale, commercial
We measure the fair value of our commercial mortgage loans held-for-sale using a discounted cash flow analysis unless observable market data (i.e., securitized pricing) is available. A discounted cash flow analysis requires management to make estimates regarding future interest rates and credit spreads. The most significant of these inputs relates to credit spreads and is unobservable. Thus, we have determined that the fair values of mortgage loans valued using a discounted cash flow analysis should be classified in Level III of the fair value hierarchy, while mortgage loans valued using securitized pricing should be classified in Level II of the fair value hierarchy. Mortgage loans classified in Level III are transferred to Level II if securitized pricing becomes available.
Loans held-for-sale and loans held-for-investment, residential
We measure the fair value of our residential loans held-for-sale and held-for-investment based on the net present value of expected future cash flows using a combination of observable and unobservable inputs. Observable market participant assumptions include pricing related to trades of residential loans with similar characteristics. Unobservable inputs include the expectation of future cash flows, which involves judgments about the underlying collateral, the creditworthiness of the borrower, estimated prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs, these loans have been classified within Level III.
RMBS are valued utilizing observable and unobservable market inputs. The observable market inputs include recent transactions, broker quotes and vendor prices (“market data”). However, given the implied price dispersion amongst the market data, the fair value determination for RMBS has also utilized significant unobservable inputs in discounted cash flow models including prepayments, default and severity estimates based on the recent performance of the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macroeconomic events (e.g., housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs these securities have been classified within Level III.
CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities and the spreads used in the prior valuation. We obtain current market spread information where available and use this information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value hierarchy. CMBS may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the CMBS become or cease to be observable.
47
Equity security
The equity security is publicly registered and traded in the U.S. and its market price is listed on the London Stock Exchange. The security has been classified within Level I.
Domestic servicing rights
The fair value of this intangible is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this intangible in its entirety should be classified in Level III of the fair value hierarchy.
Derivatives
The valuation of derivative contracts are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The valuation of over the counter derivatives are determined using discounted cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. For credit index instruments, fair value is determined based on changes in the relevant indices from the date of initiation of the instrument to the reporting date, as these changes determine the amount of any future cash settlement between us and the counterparty. These indices are considered Level II inputs as they are directly observable.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of March 31, 2021 and December 31, 2020, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level II of the fair value hierarchy.
Liabilities of consolidated VIEs
Our consolidated VIE liabilities generally represent bonds that are not owned by us. The majority of these are either traded in the marketplace or can be analogized to similar securities that are traded in the marketplace. For these liabilities, pricing is considered to be Level II, where the valuation is based upon quoted prices for similar instruments traded in active markets. We generally utilize third party pricing service providers for valuing these liabilities. In order to determine whether to utilize the valuations provided by third parties, we conduct an ongoing evaluation of their valuation methodologies and processes, as well as a review of the individual valuations themselves. In evaluating third party pricing for reasonableness, we consider a variety of factors, including market transaction information for the particular bond, market transaction information for bonds within the same trust, market transaction information for similar bonds, the bond’s ratings and the bond’s subordination levels.
48
For the minority portion of our consolidated VIE liabilities which consist of unrated or non-investment grade bonds that are not owned by us, pricing may be either Level II or Level III. If independent third party pricing similar to that noted above is available, we consider the valuation to be Level II. If such third party pricing is not available, the valuation is generated from model-based techniques that use significant unobservable assumptions, and we consider the valuation to be Level III. For VIE liabilities classified as Level III, valuation is determined based on discounted expected future cash flows which take into consideration expected duration and yields based on market transaction information, ratings, subordination levels, vintage and current market spread. VIE liabilities may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the VIE liabilities become or cease to be observable.
Assets of consolidated VIEs
The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets of the VIE, we maximize the use of observable inputs over unobservable inputs. The individual assets of a VIE are inherently incapable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Because our methodology for valuing these assets does not value the individual assets of a VIE, but rather uses the value of the VIE liabilities as an indicator of the fair value of VIE assets as a whole, we have determined that our valuations of VIE assets in their entirety should be classified in Level III of the fair value hierarchy.
Fair Value Only Disclosed
We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:
Loans held-for-investment and loans held-for-sale
We estimate the fair values of our loans not carried at fair value on a recurring basis by discounting their expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the financial statements. Since these inputs are unobservable, we have determined that the fair value of these loans in their entirety would be classified in Level III of the fair value hierarchy.
HTM debt securities
We estimate the fair value of our mandatorily redeemable preferred equity interests in commercial real estate companies and infrastructure bonds using the same methodology described for our loans held-for-investment. We estimate the fair value of our HTM CMBS using the same methodology described for our CMBS carried at fair value on a recurring basis.
Secured financing agreements and CLO
The fair value of the secured financing agreements and CLO are determined by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if executed in the current market. We have determined that our valuation of these instruments should be classified in Level III of the fair value hierarchy.
Unsecured senior notes
The fair value of our unsecured senior notes is determined based on the last available bid price for the respective notes in the current market. As these prices represent observable market data, we have determined that the fair value of these instruments would be classified in Level II of the fair value hierarchy.
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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, 2021 and December 31, 2020 (amounts in thousands):
Level I
Level II
Level III
Financial Assets:
Loans under fair value option
763,773
19,256
VIE assets
63,371,530
63,322,846
Financial Liabilities:
VIE liabilities
58,669,281
2,227,428
60,931,514
58,704,086
1,022,979
19,457
65,513,117
65,461,315
60,756,495
2,019,876
62,817,695
60,797,819
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The changes in financial assets and liabilities classified as Level III are as follows for the three months ended March 31, 2021 and 2020 (amounts in thousands):
Loans at
VIE
VIE Assets
January 1, 2021 balance
(2,019,876)
63,441,439
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale
372
(2,264,591)
65,681
(2,208,812)
Net accretion
Included in OCI
Purchases / Originations
Issuances
Cash repayments / receipts
(53,071)
(7,251)
(573)
(1,137)
(62,032)
Transfers into Level III
(409,267)
Transfers out of Level III
148,775
Consolidation of VIEs
March 31, 2021 balance
(2,227,428)
61,095,418
Amount of unrealized gains (losses) attributable to assets still held at March 31, 2021:
Included in earnings
(7,708)
(2,204,436)
January 1, 2020 balance
1,436,194
189,576
25,008
16,917
62,187,175
(2,537,392)
61,317,478
5,738
(3,506,792)
146,282
(3,371,299)
2,661
746,880
(751,746)
(7,940)
(759,686)
(67,397)
(6,549)
(371)
(8,916)
(83,233)
(101,265)
1,090,325
(71,095)
2,406,327
March 31, 2020 balance
1,347,797
170,640
22,435
16,524
61,157,805
(1,506,437)
61,208,764
Amount of unrealized (losses) gains attributable to assets still held at March 31, 2020:
(39,070)
(647)
(3,397,959)
Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.
The following table presents the fair values of our financial instruments not carried at fair value on the condensed consolidated balance sheets (amounts in thousands):
Fair
Financial assets not carried at fair value:
12,402,351
12,460,388
11,116,929
11,107,316
Financial liabilities not carried at fair value:
11,827,110
11,900,381
11,076,744
11,108,364
1,803,224
1,786,667
51
The following is quantitative information about significant unobservable inputs in our Level III measurements for those assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
Valuation
Unobservable
Range (Weighted Average) as of (1)
Technique
Input
Discounted cash flow, market pricing
Coupon (d)
3.4% - 9.5% (5.5%)
3.3% - 9.7% (5.9%)
Remaining contractual term (d)
7.0 - 39.0 years (24.7 years)
7.3 - 39.3 years (26.3 years)
FICO score (a)
519 - 823 (732)
519 - 823 (727)
LTV (b)
15% - 94% (66%)
5% - 94% (68%)
Purchase price (d)
85.6% - 104.8% (101.7%)
84.4% - 104.8% (99.8%)
Discounted cash flow
Constant prepayment rate (a)
3.5% - 17.3% (7.4%)
3.6% - 19.4% (7.6%)
Constant default rate (b)
0.7% - 5.0% (2.2%)
0.7% - 5.4% (2.4%)
Loss severity (b)
0% - 84% (17%) (f)
0% - 85% (20%) (f)
Delinquency rate (c)
9% - 32% (18%)
10% - 32% (19%)
Servicer advances (a)
23% - 84% (53%)
23% - 82% (54%)
Annual coupon deterioration (b)
0.0% - 1.2% (0.1%)
0.0% - 0.9% (0.1%)
Putback amount per projected total collateral loss (e)
0% -17% (0.8%)
Yield (b)
0% - 298.5% (5.9%)
0% - 536.6% (7.1%)
Duration (c)
0 - 7.6 years (6.0 years)
0 - 7.6 years (5.3 years)
Debt yield (a)
7.25% (7.25%)
7.50% (7.50%)
Discount rate (b)
15% (15%)
0% - 752.4% (16.9%)
0% - 312.2% (14.3%)
0 - 20.6 years (3.8 years)
0 - 16.3 years (3.8 years)
0% - 752.4% (17.3%)
0% - 312.2% (14.4%)
0 - 11.0 years (3.7 years)
0 - 10.8 years (3.8 years)
Information about Uncertainty of Fair Value Measurements
52
20. Income Taxes
Certain of our domestic subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.
Our TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing mortgage loans, and investing in entities which engage in real estate-related operations. As of March 31, 2021 and December 31, 2020, approximately $959.6 million and $1.4 billion, respectively, of assets were owned by TRS entities. Our TRSs are not consolidated for U.S. federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.
The following table is a reconciliation of our U.S. federal income tax provision (benefit) determined using our statutory federal tax rate to our reported income tax (benefit) provision for the three months ended March 31, 2021 and 2020 (dollars in thousands):
Federal statutory tax rate
26,199
21.0
(15,329)
REIT and other non-taxable loss
(24,501)
(19.6)
9,914
(13.6)
State income taxes
558
0.4
(1,779)
2.4
Federal benefit of state tax deduction
(117)
(0.1)
374
(0.5)
91
0.1
Effective tax rate
2,230
(6,729)
9.2
In response to the COVID-19 pandemic, the U.S. and many other governments have enacted, or are contemplating enacting, measures to provide aid and economic stimulus. These measures included deferring the due dates of tax payments and other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., included measures to assist companies, including temporary changes to income and non-income-based tax laws, and allowed companies to carry back tax net operating losses (“NOLs”) generated in 2018 to 2020 to the five preceding tax years. The Company plans to carry back its NOL generated in 2020 to a year in which the federal tax rate was 35%. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
The Company used the discrete tax approach in calculating the tax benefit for the three months ended March 31, 2020 due to the fact that a relatively small change in the Company’s projected pre-tax net loss could have resulted in a volatile effective tax rate. Under the discrete method, the tax benefit was determined based upon actual results as if the interim period was an annual period.
21. Commitments and Contingencies
As of March 31, 2021, our Commercial and Residential Lending Segment had future commercial loan funding commitments totaling $1.5 billion, of which we expect to fund $1.3 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Additionally, as of March 31, 2021, our Commercial and Residential Lending Segment had outstanding residential mortgage loan purchase commitments of $82.7 million.
As of March 31, 2021, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $192.5 million, including $126.7 million under revolvers and letters of credit (“LCs”), and $65.8 million under delayed draw term loans. As of March 31, 2021, $15.6 million of revolvers and LCs were outstanding.
In connection with the Infrastructure Lending Segment acquisition, we assumed guarantees of certain borrowers’ performance under existing interest rate swaps. As of March 31, 2021, we had six outstanding guarantees on interest rate swaps maturing between March 2022 and June 2025. Refer to Note 12 for further discussion.
Generally, funding commitments are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are made to the borrower.
Management is not aware of any other contractual obligations, legal proceedings, or any other contingent obligations incurred in the normal course of business that would have a material adverse effect on our 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 securitization VIEs under ASC 810. The segment information within this Note is reported on that basis.
The table below presents our results of operations for the three months ended March 31, 2021 by business segment (amounts in thousands):
Commercial and
Investing
Lending
and Servicing
Segment
Corporate
Subtotal
VIEs
170,593
18,808
1,174
18,385
564
20,940
39,889
(28,279)
124
12,456
12,580
(4,178)
1,339
65,104
9,895
90
93
82
190,531
19,465
65,144
44,547
319,687
(32,457)
315
222
38,188
38,725
44,295
8,841
15,832
5,449
29,148
103,565
(191)
11,333
3,442
1,023
18,440
4,311
38,549
87
477
23,960
4,308
18,100
3,967
Credit loss (reversal) provision, net
(529)
573
583
71
56,414
12,956
59,498
32,457
71,647
232,972
(93)
745
(1,541)
(2,050)
7,170
5,120
(5,426)
(10,714)
1,236
Earnings (loss) from unconsolidated entities
1,753
(254)
589
2,088
(354)
Gain (loss) on derivative financial instruments, net
26,141
684
4,724
9,283
(6,843)
Foreign currency (loss) gain, net
(11,594)
(49)
(63)
(68)
(307)
(141)
21,161
95
4,608
18,960
37,981
32,424
155,278
6,604
10,254
31,050
(78,490)
124,696
Income tax provision
(1,505)
(92)
(633)
153,773
6,512
30,417
122,466
(3)
(5,077)
(6,008)
(11,088)
(60)
153,770
5,177
24,409
The table below presents our results of operations for the three months ended March 31, 2020 by business segment (amounts in thousands):
192,381
22,413
2,633
18,628
701
24,800
44,129
(28,889)
172
6,442
6,614
(1,821)
78
63,961
10,107
178
143
122
513
956
211,437
23,257
64,083
44,495
343,272
(30,712)
239
40,107
40,697
53,950
13,117
17,121
7,194
28,805
(162)
8,132
4,423
1,078
20,684
4,301
38,618
84
860
778
22,852
4,584
70
19,288
4,207
40,217
8,452
77
311
104,780
26,079
60,662
36,928
73,213
301,662
(47)
318
(711)
(27,879)
(47,216)
(75,095)
77,599
(35,517)
19,383
620
671
(574)
30,805
(1,001)
(30,223)
(19,106)
29,235
(34,001)
(473)
(19)
76
(66,541)
(1,348)
(30,192)
(45,918)
(114,764)
30,821
40,116
(4,170)
(26,771)
(38,351)
(43,978)
(73,154)
Income tax benefit
4,422
145
2,162
44,538
(4,025)
(36,189)
(66,425)
Net (income) loss attributable to non-controlling interests
(5,111)
4,770
(344)
(156)
44,535
(31,882)
(31,419)
56
The table below presents our condensed consolidated balance sheet as of March 31, 2021 by business segment (amounts in thousands):
56,629
7,873
39,791
29,064
217,049
350,406
784
69,882
27,973
6,672
14,197
Loans held-for-investment, net
10,733,752
933
587,037
168,226
Investment securities
969,968
1,106,000
93,718
1,954,880
196,150
Intangible assets
38,833
70,857
109,690
(42,918)
47,514
44,435
116,789
(15,882)
119,409
140,437
13,088
162
320
24,459
97,853
3,310
274
408
101,845
(132)
61,677
7,107
85,740
44,719
9,646
208,889
(16)
VIE assets, at fair value
12,731,118
1,901,639
2,126,078
1,815,612
251,562
18,826,009
60,876,314
37,206
16,010
44,184
24,110
56,614
178,124
33,190
1,310
6,502,059
1,259,813
1,871,026
653,222
631,655
10,917,775
(21,843)
7,503,633
1,277,133
1,915,210
677,637
2,598,968
13,972,581
60,874,957
1,074,553
599,666
25,905
(298,098)
3,823,011
Treasury stock
Retained earnings (accumulated deficit)
4,111,160
(40,641)
1,285,229
(6,035,338)
5,227,367
624,506
(14,736)
987,131
(2,347,406)
118
225,604
150,844
376,566
1,357
5,227,485
210,868
1,137,975
4,853,428
57
The table below presents our condensed consolidated balance sheet as of December 31, 2020 by business segment (amounts in thousands):
160,007
4,440
32,080
19,546
346,372
562,445
772
93,445
45,113
13,195
9,673,625
1,008
1,014,402
1,112,145
103,896
1,969,414
197,843
40,370
71,123
111,493
(41,376)
54,407
44,664
124,166
(16,112)
6,595
147
87,922
2,091
123
5,978
96,114
(134)
61,638
4,531
69,859
44,579
10,148
190,755
12,097,900
1,769,340
2,118,956
1,735,142
396,270
18,117,608
62,755,901
41,104
12,144
43,630
45,309
64,583
206,770
75
39,165
39,082
1,718
524
5,893,999
1,240,763
1,794,609
606,100
632,719
10,168,190
(22,000)
6,904,739
1,254,625
1,838,239
651,938
2,606,946
13,256,487
62,754,446
1,192,584
496,387
98,882
(322,992)
3,744,878
Accumulated other comprehensive income (loss)
3,956,405
18,328
(44,832)
1,260,819
(5,820,453)
5,193,046
514,715
54,050
937,763
(2,210,676)
115
226,667
145,441
372,223
1,455
5,193,161
280,717
1,083,204
4,861,121
58
23. Subsequent Events
Our significant events subsequent to March 31, 2021 were as follows:
In April 2021, we refinanced a pool of our infrastructure loans held-for-investment through a $500.0 million new issue CLO, STWD 2021-SIF1, with $410.0 million of third party financing at an average coupon of LIBOR + 181 bps. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO for a period of three years.
In May 2021, we refinanced a pool of our commercial loans held-for-investment through a $1.3 billion CLO, STWD 2021-FL2, with $1.1 billion of third party financing at an average coupon of LIBOR + 150 bps. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO for a period of two years.
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, 2020 (our “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.
Overview
Refer to Note 1 of our condensed consolidated financial statements included herein (the “Condensed Consolidated Financial Statements”) for further discussion of our business and organization.
COVID-19 Pandemic
The outbreak of the COVID-19 pandemic beginning in the first quarter of 2020 and its continuing impact on the financial, economic and capital markets environment, and future developments in these and other areas, present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our investments. The full extent of the impact and effects of COVID-19 will depend on future developments, including, among other factors, the duration and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown.
Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of our Form 10-K.
Asset Performance and Collections
We maintain an in-house team of asset management professionals who oversee our commercial loans and are in regular communication with these borrowers. We have utilized these relationships to address the potential impacts of the COVID-19 pandemic on the assets which secure our loans, particularly hospitality assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences which have led to cash flow pressures at the underlying properties. In some cases, these borrowers have requested temporary interest deferral or forbearance, or other modifications of their loans.
Since the outbreak of the COVID-19 pandemic, we have granted certain payment related loan modifications to our commercial borrowers, consisting principally of partial and temporary deferrals of interest and the repurposing of reserves, many of which were coupled with additional equity commitments from sponsors. We are generally encouraged by our borrowers’ response to the COVID-19 pandemic’s impacts on their properties. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments. As of March 31, 2021, we had one commercial loan held-for-investment with an aggregate principal balance of $40.8 million which remained on its post-COVID partial interest deferral.
In response to the impact of COVID-19 on certain of our residential borrowers, we began offering short-term relief starting in the first quarter of 2020. Under the terms of these plans, borrowers were granted up to a three to six-month “zero pay” forbearance with payments required to resume at the conclusion of the plan. Since their peak last summer, we have seen the majority of these borrowers resume making payments, with some fully prepaying their loans. We continue to see loans in forbearance decrease, with strong home price appreciation keeping any estimated credit losses low. For those loans which have not yet resumed payments, we continue to evaluate loss mitigation options, including forbearance, repayment plans, loan modification and foreclosure. In accordance with our policies, we placed any residential loans that were more than 90 days delinquent on nonaccrual.
In our property segment, we collected 98% of rents due during the three months ended March 31, 2021. Collections were particularly strong in our Woodstar I and Woodstar II affordable housing portfolios, where 98% of rent due was collected. Given current demographic trends, which tend to favor flexible rental arrangements, we continue to see sustained demand in multifamily properties and decreased turnover.
61
In our infrastructure segment, during the three months ended March 31, 2021, we collected 100% of interest due and did not grant any payment related loan modifications.
Goodwill and Intangible Assets
Developments During the First Quarter of 2021
Commercial and Residential Lending Segment
62
Subsequent Events
Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to March 31, 2021.
63
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 securitization variable interest entities (“VIEs”), particularly within revenues and other income, as discussed in Note 2 to the Condensed Consolidated Financial Statements. For a discussion of our results of operations excluding the impact of Accounting Standards Codification (“ASC”) Topic 810 as it relates to the consolidation of securitization VIEs, refer to the section captioned “Non-GAAP Financial Measures”.
We have elected to present a comparison of our results of operations for the current quarter with that of the immediately preceding quarter, as permitted under the recently amended SEC disclosure guidelines. Because our business is not seasonal, we believe this results in a more meaningful comparison of quarterly results than a comparison to the same quarter of the prior year. We continue to present the required comparison of current year-to-date results with the same period of the prior year. The following table compares our summarized results of operations for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020 by business segment (amounts in thousands):
$ Change
March 31, 2021 vs.
March 31, 2020
196,309
(5,778)
(20,906)
19,250
215
(3,792)
64,065
1,079
1,061
45,372
(825)
Securitization VIE eliminations
(34,434)
1,977
(1,745)
290,562
(3,332)
(25,330)
50,999
5,415
(48,366)
5,555
7,401
(13,123)
61,289
(1,791)
(1,164)
39,722
(7,265)
(4,471)
73,965
(2,318)
(1,566)
(127)
(46)
231,403
1,476
(68,736)
13,318
7,843
87,702
(259)
354
1,443
391
4,217
34,800
22,349
(3,389)
64,878
(1,239)
(5,604)
(36,078)
34,317
(1,893)
1,603
68,877
1,528
154,348
Income (loss) before income taxes:
158,628
(3,350)
115,162
13,436
(6,832)
10,774
3,167
7,087
37,025
27,999
3,051
69,401
(75,204)
(3,286)
(34,512)
(96)
128,036
(3,280)
197,754
(13,381)
11,151
(8,959)
(7,687)
(3,461)
(10,648)
Net income attributable to Starwood Property Trust, Inc.
106,968
4,410
178,147
Three Months Ended March 31, 2021 Compared to the Three Months Ended December 31, 2020
Revenues
For the three months ended March 31, 2021, revenues of our Commercial and Residential Lending Segment decreased $5.8 million to $190.5 million, compared to $196.3 million for the three months ended December 31, 2020. This decrease was primarily due to decreases in interest income from loans of $2.4 million and investment securities of $2.7 million and a decrease in rental income from foreclosed properties of $0.6 million due to the sale of a property in the first quarter of 2021. The decrease in interest income from loans was principally due to lower average balances of residential loans reflecting the timing of purchases and securitizations. The decrease in interest income from investment securities was primarily due to lower average RMBS investment balances reflecting sales of RMBS late in the fourth quarter of 2020.
Costs and Expenses
For the three months ended March 31, 2021, costs and expenses of our Commercial and Residential Lending Segment increased $5.4 million to $56.4 million, compared to $51.0 million for the three months ended December 31, 2020. This increase was primarily due to a $4.5 million decrease in credit loss reversal and a $2.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by a $1.4 million decrease in general and administrative expenses reflecting lower professional fees. The credit loss reversal decreased from $5.0 million in the fourth quarter of 2020 to $0.5 million in the first quarter of 2021. The larger reversal in the fourth quarter of 2020 was primarily due to an improvement in macroeconomic forecasts and the effect on our then estimate of current expected credit losses (“CECL”). The increase in interest expense was primarily due to higher average borrowings outstanding, partially offset by lower average LIBOR rates.
Net Interest Income (amounts in thousands)
Change
173,014
(2,421)
21,132
(2,747)
(44,295)
(41,987)
(2,308)
Net interest income
144,683
152,159
(7,476)
For the three months ended March 31, 2021, net interest income of our Commercial and Residential Lending Segment decreased $7.5 million to $144.7 million, compared to $152.2 million for the three months ended December 31, 2020. This decrease reflects the decreases in interest income and the increase in interest expense on our secured financing facilities, both as discussed in the sections above.
During the three months ended March 31, 2021 and December 31, 2020, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities were as follows:
6.3
7.5
7.2
Overall
6.1
6.4
The overall weighted average unlevered yield was lower primarily due to a $142.2 million commercial loan which was reclassified as held-for-sale, a $187.6 million commercial loan placed on nonaccrual and slightly lower LIBOR rates affecting our commercial yields, partially offset by a shift in the relative mix of loans and investment securities toward higher-yielding RMBS affecting our residential yields.
65
During the three months ended March 31, 2021 and December 31, 2020, the Commercial and Residential Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 2.6% and 2.5%, respectively.
Other Income
For the three months ended March 31, 2021, other income of our Commercial and Residential Lending Segment increased $7.9 million to $21.2 million compared to $13.3 million for the three months ended December 31, 2020. This increase was primarily due to (i) a $75.3 million favorable change in gain (loss) on derivatives and (ii) a $17.7 million gain on sale of a foreclosed property, partially offset by (iii) a $55.6 million unfavorable change in foreign currency gain (loss) and (iv) a $30.7 million unfavorable change in fair value of residential loans. The favorable change in gain (loss) on derivatives in the first quarter of 2021 reflects a $63.4 million favorable change in gain (loss) on foreign currency hedges and an $11.9 million increased gain 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 investments. The favorable change in gain (loss) on foreign currency hedges and the unfavorable change in foreign currency gain (loss) reflect the strengthening of the U.S. dollar against the Euro (“EUR”) and Australian dollar (“AUD”), partially offset by a weakening against the pound sterling (“GBP”), in the first quarter of 2021 compared to a weakening of the U.S. dollar against those currencies in the fourth quarter of 2020. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments and to hedge our interest rate risk on residential loans held-for-sale.
For the three months ended March 31, 2021, revenues of our Infrastructure Lending Segment increased $0.2 million to $19.5 million, compared to $19.3 million for the three months ended December 31, 2020. This was primarily due to a slight increase in interest income from loans.
For the three months ended March 31, 2021, costs and expenses of our Infrastructure Lending Segment increased $7.4 million to $13.0 million, compared to $5.6 million for the three months ended December 31, 2020. The increase was primarily due to a $7.7 million increase in credit loss provision, partially offset by a $0.4 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision was $0.6 million in the first quarter of 2021 compared to a reversal of $7.1 million in the fourth quarter of 2020. The reversal in the fourth quarter of 2020 was primarily due to an improvement in macroeconomic forecasts and the effect on our estimate of CECL allowances. The decrease in interest expense was primarily due to lower average LIBOR rates.
18,477
331
618
(54)
(8,841)
(9,204)
363
10,531
9,891
For the three months ended March 31, 2021, net interest income of our Infrastructure Lending Segment increased $0.6 million to $10.5 million, compared to $9.9 million for the three months ended December 31, 2020. The increase reflects the net increase in interest income and the decrease in interest expense on the secured financing facilities, both as discussed in the sections above.
66
During the three months ended March 31, 2021 and 2020, the weighted average unlevered yields on the Infrastructure Lending Segment’s investments were as follows:
Loans and investment securities held-for-investment
4.8
3.7
During the three months ended March 31, 2021 and December 31, 2020, the Infrastructure Lending Segment’s weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 2.9% and 3.0%, respectively.
Other Income (Loss)
For the three months ended March 31, 2021 and December 31, 2020, other income of our Infrastructure Lending Segment increased $0.4 million to $0.1 million, compared to a loss of $0.3 million for the three months ended December 31, 2020.
Change in Results by Portfolio (amounts in thousands)
$ Change from prior period
Costs and
Gain (loss) on derivative
Income (loss) before
expenses
financial instruments
Other income (loss)
income taxes
(13)
125
(61)
3,833
4,019
(1,471)
133
2,128
449
595
Ireland Portfolio
Other/Corporate
392
332
3,966
251
See Note 6 to the Condensed Consolidated Financial Statements for a description of the above-referenced Property Segment portfolios.
For the three months ended March 31, 2021, revenues of our Property Segment increased $1.0 million to $65.1 million, compared to $64.1 million for the three months ended December 31, 2020.
For the three months ended March 31, 2021, costs and expenses of our Property Segment decreased $1.8 million to $59.5 million, compared to $61.3 million for the three months ended December 31, 2020.
For the three months ended March 31, 2021, other income of our Property Segment increased $4.2 million to $4.6 million, compared to $0.4 million for the three months ended December 31, 2020. The improvement in other income was primarily due to a $4.0 million increased gain on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio.
For the three months ended March 31, 2021, revenues of our Investing and Servicing Segment decreased $0.8 million to $44.5 million, compared to $45.3 million for the three months ended December 31, 2020. The decrease primarily reflects a $1.3 million decrease in interest income from conduit loans, partially offset by a $0.4 million increase in interest income from CMBS.
For the three months ended March 31, 2021, costs and expenses of our Investing and Servicing Segment decreased $7.2 million to $32.5 million, compared to $39.7 million for the three months ended December 31, 2020. The decrease in costs and expenses was primarily due to a decrease of $7.1 million in general and administrative expenses reflecting lower incentive compensation, principally due to lower securitization volume.
For the three months ended March 31, 2021, other income of our Investing and Servicing Segment decreased $3.3 million to $19.0 million, compared to $22.3 million for the three months ended December 31, 2020. The decrease in other income was primarily due to (i) a $32.2 million lesser increase in fair value of conduit loans, partially offset by (ii) a $22.5 million favorable change in fair value of CMBS investments and (iii) a $7.7 million increased gain on derivatives which primarily hedge our interest rate risk on conduit loans.
Corporate and Other Items
Corporate Costs and Expenses
For the three months ended March 31, 2021, corporate expenses decreased $2.3 million to $71.6 million, compared to $73.9 million for the three months ended December 31, 2020. This was primarily due to a decrease of $1.9 million in incentive management fees.
Corporate Other Loss
For the three months ended March 31, 2021, corporate other loss increased $5.6 million to $6.8 million, compared to $1.2 million for the three months ended December 31, 2020. This was due to a $6.1 million increased loss on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing, partially offset by the non-recurrence of a $0.5 million loss on extinguishment of debt in the fourth quarter of 2020.
Securitization VIE Eliminations
Securitization VIE eliminations primarily reclassify interest income and servicing fee revenues to other income (loss) for the CMBS and RMBS VIEs that we consolidate as primary beneficiary. Such eliminations have no overall effect on net income (loss) attributable to Starwood Property Trust. The reclassified revenues, along with applicable changes in fair value of investment securities and servicing rights, comprise the other income (loss) caption “Change in net assets related to consolidated VIEs,” which represents our beneficial interest in those consolidated VIEs. The magnitude of the securitization VIE eliminations is merely a function of the number of CMBS and RMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of operating results. The eliminations primarily relate to CMBS trusts for which the Investing and Servicing Segment is deemed the primary beneficiary and, to a much lesser extent, some CMBS and RMBS trusts for which the Commercial and Residential Lending Segment is deemed the primary beneficiary.
68
Income Tax Provision
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in taxable REIT subsidiaries (“TRSs”). For the three months ended March 31, 2021, our income tax provision decreased $11.2 million to $2.2 million compared to $13.4 million for the three months ended December 31, 2020 due to a decrease in taxable income of our TRSs in the first quarter of 2021.
Net Income Attributable to Non-controlling Interests
During the three months ended March 31, 2021, net income attributable to non-controlling interests increased $3.4 million to $11.1 million, compared to $7.7 million during the three months ended December 31, 2020. The increase was primarily due to non-controlling interests in increased earnings of a consolidated CMBS joint venture in which we hold a 51% interest.
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
For the three months ended March 31, 2021, revenues of our Commercial and Residential Lending Segment decreased $20.9 million to $190.5 million, compared to $211.4 million for the three months ended March 31, 2020. This decrease was primarily due to decreases in interest income from loans of $21.8 million and investment securities of $0.2 million, partially offset by an increase in rental income from foreclosed properties of $1.2 million. The decrease in interest income from loans was principally due to lower prepayment related income, lower average balances of residential loans and lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans), partially offset by higher average balances of commercial loans. The slight decrease in interest income from investment securities was primarily due to lower average LIBOR rates and investment balances affecting interest income from our commercial investment securities, partially offset by higher average RMBS investment balances.
For the three months ended March 31, 2021, costs and expenses of our Commercial and Residential Lending Segment decreased $48.4 million to $56.4 million, compared to $104.8 million for the three months ended March 31, 2020. This decrease was primarily due to a $40.7 million decrease in credit loss provision and a $9.7 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision decreased from $40.2 million in the first quarter of 2020 to a $0.5 million reversal in the first quarter of 2021. The large provision in the first quarter of 2020 was due to the significant deterioration in macroeconomic forecasts due to the initial disruption caused by the COVID-19 pandemic and its effect on our then estimate of CECL. The decrease in interest expense was primarily due to lower average LIBOR rates partially offset by higher average borrowings outstanding.
(21,788)
(243)
(53,950)
9,655
157,059
(12,376)
For the three months ended March 31, 2021, net interest income of our Commercial and Residential Lending Segment decreased $12.4 million to $144.7 million, compared to $157.1 million for the three months ended March 31, 2020. This decrease reflects the decreases in interest income, partially offset by the decrease in interest expense on our secured financing facilities, both as discussed in the sections above.
69
During the three months ended March 31, 2021 and 2020, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities were as follows:
6.8
The overall weighted average unlevered yield was lower primarily due to lower prepayment related income and LIBOR rates affecting our commercial yields, partially offset by the increased investment in higher-yielding RMBS affecting our residential yields.
During the three months ended March 31, 2021 and 2020, the Commercial and Residential Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 2.6% and 3.5%, respectively. The decrease in borrowing rates primarily reflects decreases in LIBOR.
For the three months ended March 31, 2021, other income of our Commercial and Residential Lending Segment increased $87.7 million to $21.2 million compared to a loss of $66.5 million for the three months ended March 31, 2020. This increase was primarily due to (i) a $25.8 million lesser decrease in fair value of investment securities, (ii) a $24.8 million lesser decrease in fair value of residential loans, (iii) a $22.4 million decrease in foreign currency loss and (iv) a $17.7 million gain on sale of a foreclosed property, all partially offset by (v) a $4.7 million lower gain on derivatives. The greater decreases in fair value of investment securities and residential loans in the first quarter of 2020 were primarily attributable to widening credit spreads resulting from market disruption and dislocation caused by the initial impacts of COVID-19. The lower gain on derivatives in the first quarter of 2021 reflects a $39.2 million lower gain on foreign currency hedges, partially offset by a $34.5 million favorable change in gain (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 investments. The decreases in foreign currency loss and foreign currency hedge gains reflect the strengthening of the U.S. dollar against the EUR and AUD, partially offset by a weakening against the GBP, in the first quarter of 2021 compared to a greater overall strengthening of the U.S. dollar against those currencies in the first quarter of 2020. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments and to hedge our interest rate risk on residential loans held-for-sale.
For the three months ended March 31, 2021, revenues of our Infrastructure Lending Segment decreased $3.8 million to $19.5 million, compared to $23.3 million for the three months ended March 31, 2020. This was primarily due to a decrease in interest income from loans of $3.6 million principally due to lower average LIBOR rates.
For the three months ended March 31, 2021, costs and expenses of our Infrastructure Lending Segment decreased $13.1 million to $13.0 million, compared to $26.1 million for the three months ended March 31, 2020. The decrease was primarily due to a $7.9 million decrease in credit loss provision and a $4.3 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision in the first quarter of 2020 was magnified by the significant deterioration of macroeconomic forecasts due to the initial economic disruption caused by the COVID-19 pandemic. The decrease in interest expense was primarily due to lower average LIBOR rates.
(3,605)
(137)
(13,117)
4,276
9,997
534
For the three months ended March 31, 2021, net interest income of our Infrastructure Lending Segment increased $0.5 million to $10.5 million, compared to $10.0 million for the three months ended March 31, 2020. The increase reflects the decrease in interest expense on the secured financing facilities, partially offset by the decrease in interest income, both as discussed in the sections above.
3.6
During the three months ended March 31, 2021 and 2020, the Infrastructure Lending Segment’s weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 2.9% and 4.4%, respectively.
For the three months ended March 31, 2021 and 2020, other income of our Infrastructure Lending Segment increased $1.4 million to $0.1 million, compared to a loss of $1.3 million for the three months ended March 31, 2020. The improvement in other income (loss) primarily reflects a $1.7 million favorable change in gain (loss) on derivatives consisting of a $2.2 million favorable change on interest rate swaps and swap guarantees, partially offset by a $0.5 million decrease in gains on foreign currency hedges.
(4)
(753)
34,825
35,966
(139)
566
368
284
(57)
(552)
(6)
546
34,947
(147)
For the three months ended March 31, 2021, revenues of our Property Segment increased $1.0 million to $65.1 million, compared to $64.1 million for the three months ended March 31, 2020.
For the three months ended March 31, 2021, costs and expenses of our Property Segment decreased $1.2 million to $59.5 million, compared to $60.7 million for the three months ended March 31, 2020. The decrease in costs and expenses primarily reflects a $1.3 million decrease in interest expense.
For the three months ended March 31, 2021, other income of our Property Segment increased $34.8 million to $4.6 million, compared to a loss of $30.2 million for the three months ended March 31, 2020. The improvement in other income (loss) was primarily due to a $34.9 million favorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio.
For the three months ended March 31, 2021 and 2020, revenues of our Investing and Servicing Segment were level at $44.5 million. A $6.0 million increase in servicing fees was offset by decreases in interest income from CMBS and conduit loans and, to a lesser extent, other revenues.
For the three months ended March 31, 2021, costs and expenses of our Investing and Servicing Segment decreased $4.4 million to $32.5 million, compared to $36.9 million for the three months ended March 31, 2020. The decrease in costs and expenses was primarily due to decreases of $2.2 million in general and administrative expenses reflecting lower compensation costs and $1.7 million in interest expense on borrowings related to conduit loans, CMBS and properties held.
For the three months ended March 31, 2021, other income of our Investing and Servicing Segment increased $64.9 million to $19.0 million, compared to a loss of $45.9 million for the three months ended March 31, 2020. The improvement in other income (loss) was primarily due to (i) a $54.4 million favorable change in fair value of CMBS investments and (ii) a $28.4 million favorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on conduit loans, partially offset by (iii) an $18.1 million lesser increase in fair value of conduit loans. The fair value of our CMBS investments was adversely affected in the first quarter of 2020 by widening credit spreads resulting from market disruption and dislocation caused by the initial impacts of COVID-19.
For the three months ended March 31, 2021, corporate expenses decreased $1.6 million to $71.6 million, compared to $73.2 million for the three months ended March 31, 2020. This was primarily due to a decrease of $1.9 million in incentive management fees.
72
Corporate Other Income (Loss)
For the three months ended March 31, 2021, corporate other income decreased $36.0 million to a loss of $6.8 million, compared to income of $29.2 million for the three months ended March 31, 2020. This was due to an unfavorable change in gain (loss) on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing.
Refer to the preceding comparison of the three months ended March 31, 2021 to the three months ended December 31, 2020 for a discussion of the effect of securitization VIE eliminations.
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in TRSs. For the three months ended March 31, 2021, our income taxes increased $8.9 million to $2.2 million compared to a benefit of $6.7 million for the three months ended March 31, 2020 due to an increase in taxable income of our TRSs in the first quarter of 2021.
Net Income Attributable to Non-controlling Interests
During the three months ended March 31, 2021, net income attributable to non-controlling interests increased $10.6 million to $11.1 million, compared to $0.5 million during the three months ended March 31, 2020. The increase was primarily due to non-controlling interests in increased earnings of a consolidated CMBS joint venture in which we hold a 51% interest.
Non-GAAP Financial Measures
Distributable Earnings is a non-GAAP financial measure. We calculate Distributable Earnings as GAAP net income (loss) excluding the following:
The CECL reserve has been excluded from Distributable Earnings consistent with other unrealized gains (losses) pursuant to our existing policy for reporting Distributable Earnings. We expect to only recognize such potential credit losses in Distributable Earnings if and when such amounts are deemed nonrecoverable upon a realization event. This is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold, but non-recoverability may also be determined if, in our determination, it is nearly certain that all amounts due will not be collected. The realized loss amount reflected in Distributable Earnings will equal the difference between the cash received, or expected to be received, and the book value of the asset, and is reflective of our economic experience as it relates to the ultimate realization of the loan.
73
We believe that Distributable Earnings provides meaningful information to consider in addition to our net income (loss) and cash flow from operating activities determined in accordance with GAAP. We believe Distributable Earnings is a useful financial metric for existing and potential future holders of our common stock as historically, over time, Distributable Earnings has been a strong indicator of our dividends per share. As a REIT, we generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments, and therefore we believe our dividends are one of the principal reasons stockholders may invest in our common stock. Further, Distributable Earnings helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations, and is a performance metric we consider when declaring our dividends. We also use Distributable Earnings (previously defined as “Core Earnings”) to compute the incentive fee due under our management agreement.
Distributable Earnings does not represent net income (loss) or cash generated from operating activities and should not be considered as an alternative to GAAP net income (loss), or an indication of our GAAP cash flows from operations, a measure of our liquidity, taxable income, or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.
The weighted average diluted share count applied to Distributable Earnings for purposes of determining Distributable Earnings per share (“EPS”) is computed using the GAAP diluted share count, adjusted for the following:
The following table presents our diluted weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Distributable EPS calculation (amounts in thousands):
Diluted weighted average shares - GAAP EPS
292,900
Add: Unvested stock awards
4,484
3,361
2,723
Add: Woodstar II Class A Units
10,622
10,598
10,738
Add: Other dilutive securities not included above
Less: Convertible Notes dilution
(9,649)
Diluted weighted average shares - Distributable EPS
298,688
297,210
295,136
The definition of Distributable Earnings allows management to make adjustments, subject to the approval of a majority of our independent directors, in situations where such adjustments are considered appropriate in order for Distributable Earnings to be calculated in a manner consistent with its definition and objective. No adjustments to the definition of Distributable Earnings became effective during the three months ended March 31, 2021.
74
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended March 31, 2021, by business segment (amounts in thousands, except per share data):
and
Costs and expenses
(56,414)
(12,956)
(59,498)
(71,647)
(232,972)
Income attributable to non-controlling interests
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units
5,077
Non-cash equity compensation expense
1,781
300
881
7,317
Management incentive fee
13,123
(164)
(89)
(253)
247
18,161
3,603
22,102
Interest income adjustment for securities
(1,300)
3,995
2,695
Extinguishment of debt, net
(246)
Income tax (provision) benefit associated with realized (gains) losses
(6,495)
405
(6,090)
Other non-cash items
(337)
207
288
Reversal of GAAP unrealized (gains) / losses on:
Loans
10,714
(1,236)
2,050
(7,170)
(5,120)
(27,171)
(745)
(6,446)
(9,719)
9,313
Foreign currency
11,594
(Earnings) loss from unconsolidated entities
(1,753)
254
(589)
(2,088)
Sales of properties
Recognition of Distributable realized gains / (losses) on:
14,553
4,672
19,225
Realized credit loss
(2,861)
1,776
(1,085)
1,950
(35)
1,595
3,510
4,784
(10)
4,736
3,218
964
3,928
8,298
Distributable Earnings (Loss)
147,239
6,770
21,539
23,793
(48,568)
150,773
Distributable Earnings (Loss) per Weighted Average Diluted Share
0.49
0.02
0.07
0.08
(0.16)
0.50
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended December 31, 2020, by business segment (amounts in thousands, except per share data):
324,996
(50,999)
(5,555)
(61,289)
(39,722)
(73,965)
(231,530)
34,560
128,026
(5,556)
(120)
(7,705)
(Income) loss attributable to non-controlling interests
(5,100)
(2,573)
(7,677)
153,068
13,316
(1,933)
17,721
5,100
891
299
869
6,707
14,974
(278)
(367)
86
18,736
3,832
23,026
(5,037)
(7,094)
(12,131)
(1,102)
5,245
4,143
(247)
Income tax provision associated with fair value adjustments
4,883
5,433
(374)
161
(20,002)
(33,422)
(53,424)
6,294
15,377
21,671
48,046
105
(2,480)
(2,218)
3,945
47,398
(43,962)
(260)
(39)
(44,256)
(4,804)
(431)
(341)
(5,576)
2,461
32,528
34,989
398
(9,389)
(8,991)
(3,858)
(3,872)
631
(5)
679
2,914
431
4,090
140,919
6,466
31,756
(49,664)
148,437
0.47
0.11
(0.17)
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended March 31, 2020, by business segment (amounts in thousands, except per share data):
(104,780)
(26,079)
(60,662)
(36,928)
(73,213)
(301,662)
5,111
1,112
466
1,263
5,886
15,799
358
269
355
19,381
3,807
23,594
6,315
6,439
Income tax benefit associated with fair value adjustments
(5,821)
(1,442)
(7,263)
(491)
248
(84)
35,517
(19,383)
27,879
47,216
75,095
(30,563)
1,013
30,569
19,013
(27,649)
34,001
473
(51)
(620)
(671)
2,164
(62)
16,559
18,661
(4,212)
3,250
(6,087)
(2,754)
(4,271)
(194)
(4,477)
(Loss) earnings from unconsolidated entities
(556)
3,738
3,182
148,253
6,292
22,637
34,996
(50,032)
162,146
0.12
0.55
The Commercial and Residential Lending Segment’s Distributable Earnings increased by $6.3 million, from $140.9 million during the fourth quarter of 2020 to $147.2 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $189.2 million, costs and expenses were $62.8 million, other income was $28.8 million and income tax provision was $8.0 million.
Revenues, consisting principally of interest income on loans, decreased by $6.0 million in the first quarter of 2021, primarily due to decreases in interest income from loans of $2.4 million and investment securities of $2.9 million and a decrease in rental income from foreclosed properties of $0.6 million due to the sale of a property in the first quarter of 2021. The decrease in interest income from loans was principally due to lower average balances of residential loans reflecting the timing of purchases and securitizations. The decrease in interest income from investment securities was primarily due to lower average RMBS investment balances reflecting sales of RMBS late in the fourth quarter of 2020.
Costs and expenses increased by $7.8 million in the first quarter of 2021, primarily due to a $7.8 million write-off of an unsecured commercial loan and a $2.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by a $2.3 million decrease in general and administrative expenses reflecting lower professional fees.
Other income increased by $27.4 million in the first quarter of 2021, primarily due to a $12.1 million increase in residential loan securitization gains, an $8.3 million gain on sale of a foreclosed property in the first quarter of 2021 and a $5.9 million favorable change in realized gains (losses) on interest rate and foreign currency derivatives.
Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization activities which are housed in TRSs, increased $7.3 million due to an increase in realized gains from the securitization and sale of residential loans. The majority of the GAAP income tax provision related to these loans was recorded in 2020 when the loans were marked to their fair values. Because the net fair value increases were unrealized, they along with their corresponding income tax provision were previously adjusted in our reconciliation to Distributable Earnings. Upon recognition of the realized gains this quarter for Distributable Earnings purposes, the corresponding income tax provision was likewise recognized.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s Distributable Earnings increased by $0.3 million, from $6.5 million in the fourth quarter of 2020 to $6.8 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $19.5 million, costs and expenses were $12.0 million and other loss was $0.6 million.
Revenues, consisting principally of interest income on loans, increased by $0.2 million in the first quarter of 2021, primarily due to a slight increase in interest income from loans.
Costs and expenses decreased by $0.3 million in the first quarter of 2021, primarily due to a slight decrease in interest expense on the secured debt facilities used to finance this segment’s investments.
Other loss increased by $0.2 million in the first quarter of 2021.
Distributable Earnings by Portfolio (amounts in thousands)
4,312
4,300
5,513
5,339
174
6,338
4,907
1,431
6,100
5,470
630
(724)
(1,056)
Distributable Earnings
2,579
The Property Segment’s Distributable Earnings increased by $2.6 million, from $18.9 million during the fourth quarter of 2020 to $21.5 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $64.8 million, costs and expenses were $41.5 million and other loss was $1.8 million.
Revenues increased by $1.1 million in the first quarter of 2021.
Costs and expenses decreased by $1.2 million in the first quarter of 2021.
Other loss decreased by $0.3 million in the first quarter of 2021.
The Investing and Servicing Segment’s Distributable Earnings decreased by $8.0 million, from $31.8 million during the fourth quarter of 2020 to $23.8 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $48.8 million, costs and expenses were $28.0 million, other income was $6.8 million, income tax provision was $0.2 million and the deduction of income attributable to non-controlling interests was $3.6 million.
Revenues decreased by $2.1 million in the first quarter of 2021, primarily due to a decrease in interest income from CMBS and conduit loans. The treatment of CMBS interest income on a GAAP basis is complicated by our application of the ASC 810 consolidation rules. In an attempt to treat these securities similar to the trust’s other investment securities, we compute distributable interest income pursuant to an effective yield methodology. In doing so, we segregate the portfolio into various categories based on the components of the bonds’ cash flows and the volatility related to each of these components. We then accrete interest income on an effective yield basis using the components of cash flows that are reliably estimable. Other minor adjustments are made to reflect management’s expectations for other components of the projected cash flow stream. The decrease in interest income reflects decreases of $1.3 million from CMBS and $0.8 million from conduit loans held-for-sale.
Costs and expenses decreased by $7.0 million in the first quarter of 2021, primarily due to a decrease in general and administrative expenses reflecting lower incentive compensation, principally due to lower securitization volume.
Other income includes profit realized upon securitization of loans by our conduit business, gains on sales of CMBS and operating properties, gains and losses on derivatives that were either effectively terminated or novated, and earnings from unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic servicing rights intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair value due to the attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk and credit risk on our conduit loans. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair value, with all changes in fair value (realized or unrealized) recognized in earnings. The adjustments to Distributable Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Other income decreased by $19.7 million in the first quarter of 2021 primarily due to a decrease in realized gains on conduit loans of $27.9 million, partially offset by a $10.2 million decrease in recognized losses on CMBS.
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Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan securitization businesses which are housed in TRSs, decreased $6.9 million due to lower taxable income of those TRSs in the first quarter of 2021.
Income attributable to non-controlling interests increased $0.1 million in the first quarter of 2021.
Corporate costs and expenses decreased by $1.1 million, from $49.7 million during the fourth quarter of 2020 to $48.6 million in the first quarter of 2021.
Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020
The Commercial and Residential Lending Segment’s Distributable Earnings decreased by $1.1 million, from $148.3 million during the first quarter of 2020 to $147.2 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $189.2 million, costs and expenses were $62.8 million, other income was $28.8 million and income tax provision was $8.0 million.
Revenues, consisting principally of interest income on loans, decreased by $22.4 million in the first quarter of 2021, primarily due to decreases in interest income from loans of $21.8 million and investment securities of $1.7 million, partially offset by an increase in rental income from foreclosed properties of $1.2 million. The decrease in interest income from loans was principally due to lower prepayment related income, lower average balances of residential loans and lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans), partially offset by higher average balances of commercial loans. The decrease in interest income from investment securities was primarily due to lower LIBOR rates and average investment balances affecting interest income from our commercial investment securities, partially offset by higher average RMBS investment balances.
Costs and expenses increased by $0.1 million in the first quarter of 2021, primarily due to a $7.8 million write-off of an unsecured commercial loan and a $2.5 million increase in general and administrative expenses, partially offset by a $9.7 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio primarily due to lower average LIBOR rates partially offset by higher average borrowings outstanding.
Other income increased by $28.0 million in the first quarter of 2021, primarily due to residential loan securitization gains, including realized gains on related interest rate derivatives, and an $8.3 million gain on sale of a foreclosed property.
Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization activities which are housed in TRSs, increased $6.6 million due to an increase in realized gains from the securitization and sale of residential loans. In the first quarter of 2020, we recorded a GAAP net tax benefit related to unrealized fair value decreases in our residential loans. This benefit was deducted from GAAP earnings to arrive at Distributable Earnings until a gain or loss on these loans was ultimately realized. In the first quarter of 2021, we realized gains from the sale and securitization of loans which had been previously marked to their fair values, mostly in 2020. Upon recognition of the realized gains this quarter for Distributable Earnings purposes, the corresponding income tax provision was likewise recognized. Infrastructure Lending Segment
The Infrastructure Lending Segment’s Distributable Earnings increased by $0.5 million, from $6.3 million in the first quarter of 2020 to $6.8 million in the first quarter of 2021. After making adjustments for the calculation of
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Distributable Earnings, revenues were $19.5 million, costs and expenses were $12.0 million and other loss was $0.6 million.
Revenues, consisting principally of interest income on loans, decreased by $3.8 million in the first quarter of 2021, primarily due to a decrease in interest income from loans of $3.6 million principally due to lower average LIBOR rates.
Costs and expenses decreased by $5.1 million in the first quarter of 2021, primarily due to a $4.3 million decrease in interest expense on the secured debt facilities used to finance this segment’s investment portfolio principally due to lower average LIBOR rates.
Other loss increased by $0.6 million in the first quarter of 2021.
6,765
(1,252)
6,784
(446)
6,009
(1,229)
505
(1,098)
The Property Segment’s Distributable Earnings decreased by $1.1 million, from $22.6 million during the first quarter of 2020 to $21.5 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $64.8 million, costs and expenses were $41.5 million and other loss was $1.8 million.
Revenues increased by $1.2 million in the first quarter of 2021.
Costs and expenses increased by $0.1 million in the first quarter of 2021.
Other income decreased by $2.2 million to a loss in the first quarter of 2021 primarily due to an unfavorable change in realized gains (losses) on certain interest rate derivatives.
The Investing and Servicing Segment’s Distributable Earnings decreased by $11.2 million, from $35.0 million during the first quarter of 2020 to $23.8 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $48.8 million, costs and expenses were $28.0 million, other income was $6.8 million, income tax provision was $0.2 million and the deduction of income attributable to non-controlling interests was $3.6 million.
Revenues decreased by $2.3 million in the first quarter of 2021, primarily due to decreases of $7.6 million in interest income from CMBS and conduit loans, partially offset by a $6.0 million increase in servicing fees. The decrease in interest income reflects decreases of $6.2 million from CMBS and $1.4 million from conduit loans held-for-sale.
Costs and expenses decreased by $3.9 million in the first quarter of 2021, primarily due to decreases of $1.8 million in general and administrative expenses reflecting lower compensation costs and $1.7 million in interest expense on borrowings related to conduit loans, CMBS and properties held.
Other income decreased by $15.4 million in the first quarter of 2021 primarily due to decreases in realized gains of $11.9 million on conduit loans and $11.5 million on CMBS, partially offset by a $7.3 million favorable change in gain (loss) on derivatives mostly related to the conduit loans.
Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan securitization businesses which are housed in TRSs, increased $0.9 million from a benefit of $0.7 million to a provision of $0.2 million due to taxable income of those TRSs in the first quarter of 2021.
Income attributable to non-controlling interests decreased $3.5 million primarily relating to lower distributable earnings of a consolidated CMBS joint venture in which we hold a 51% interest.
Corporate costs and expenses decreased by $1.4 million, from $50.0 million during the first quarter of 2020 to $48.6 million in the first quarter of 2021 primarily due to (i) a $0.9 million increase in realized gains on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing and (ii) a $0.7 million decrease in professional fees.
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, 2020. Refer to our Form 10-K for a description of these strategies.
We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our commercial and residential real estate-related loans and infrastructure loans (and their tenants), the tenants in the properties we own, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. Further discussion of the potential impacts on us from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of our Form 10-K.
Credit Facilities
Shortly after the initial outbreak of the COVID-19 pandemic, we entered into agreements with certain of our secured credit facility lenders in our commercial lending portfolio to temporarily suspend credit mark provisions on certain of their portfolio assets in exchange for: (i) cash repayments; (ii) pledges of additional collateral; and (iii) reductions of available borrowings.
We are in frequent, consistent dialogue with the providers of our secured credit facilities regarding our management of their collateral assets in light of the impacts of the COVID-19 pandemic, including the determination of whether any extensions to these agreements are necessary as these temporary suspensions expire. Our in-house asset management team, along with an experienced team of workout professionals within our special servicer, are skilled in managing loans throughout cycles, which we believe will assist us in achieving maximum resolution on any assets impacted by the COVID-19 pandemic.
No such modifications or agreements were made with lenders on credit facilities related to our property, residential lending or infrastructure lending portfolios.
Sources of Liquidity
Our primary sources of liquidity are as follows:
Cash Flows for the Three Months ended March 31, 2021 (amounts in thousands)
Excluding Investing
GAAP
Adjustments
and Servicing VIEs
(353)
270,413
Proceeds from principal collections and sale of loans
Proceeds from sales and collections of investment securities
26,085
85,599
Net cash flows from other investments and assets
38,656
183
38,839
(1,065)
(1,120,270)
(157)
(2,001,493)
Proceeds from common stock issuances, net of offering costs
240
158
(8,675)
27,490
1,406
598,639
Net decrease in cash, cash equivalents and restricted cash
(12)
(251,218)
(772)
721,390
(784)
469,130
The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of the securitization VIEs under ASC 810. These adjustments principally relate to (i) the purchase of CMBS, RMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP basis and (ii) sales and principal collections of CMBS and RMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP basis. There is no significant net impact to overall cash resulting from these consolidations. Refer to Note 2 to the Condensed Consolidated Financial Statements for further discussion.
Cash and cash equivalents decreased by $251.2 million during the three months ended March 31, 2021, reflecting net cash used in investing activities of $1.1 billion, partially offset by net cash provided by operating activities of $270.4 million and net cash provided by financing activities of $598.6 million.
Net cash provided by operating activities of $270.4 million during the three months ended March 31, 2021 related primarily to proceeds from sales of loans held-for-sale, net of originations and purchases, of $244.6 million and cash interest income of $131.9 million from our loans and $36.1 million from our investment securities. Net rental income provided cash of $48.9 million and servicing fees provided cash of $12.9 million. Offsetting these cash inflows was cash interest expense of $80.6 million, general and administrative expenses of $29.0 million, management fees of $27.4 million and a net change in operating assets and liabilities of $66.3 million.
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Net cash used in investing activities of $1.1 billion for the three months ended March 31, 2021 related primarily to the origination and acquisition of loans held-for-investment of $2.3 billion and the purchase and funding of investment securities of $27.3 million, partially offset by proceeds received from principal collections and sales of loans of $1.1 billion and investment securities of $85.6 million and sale of an operating property for $30.6 million.
Net cash provided by financing activities of $598.6 million for the three months ended March 31, 2021 related primarily to borrowings on our debt, net of repayments and deferred loan costs, of $741.8 million, partially offset by dividend distributions of $137.7 million.
Our Investment Portfolio
The following is a review of our investment portfolio by segment.
The following table sets forth the amount of each category of investments we owned across various property types within our Commercial and Residential Lending Segment as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Unlevered
Asset Specific
Return on
Investment
Asset
First mortgages (1)
10,002,124
9,954,741
6,665,879
3,288,862
Subordinated mortgages
8.7
Mezzanine loans (1)
11.6
58,656
92,056
Other loans
13.3
Loans held-for-sale, fair value option, residential
270,096
174,739
5.6
142,798
142,202
80,500
61,702
245,472
106,447
53,854
10.9
RMBS, fair value option
160,124
39,700
209,305
CMBS, fair value option
102,900
96,883
49,798
47,085
5.5
HTM debt securities (3)
454,283
455,586
113,143
342,443
6.6
Credit loss allowance
(65,939)
12,594
49,018
44,700
12,397,499
12,431,989
7,433,237
4,998,752
8,977,365
8,930,764
5,892,684
3,038,080
11.5
58,885
31,799
9.8
573,584
268,379
252,738
110,724
56,625
11. 0
142,288
30,267
205,730
96,885
25,313
71,572
505,247
505,673
84,233
421,440
(72,360)
12,497
48,863
55,033
11,625,873
11,688,293
6,824,553
4,863,740
85
As of March 31, 2021 and December 31, 2020, our Commercial and Residential Lending Segment’s investment portfolio, excluding residential loans, RMBS, properties and other investments, had the following characteristics based on carrying values:
Collateral Property Type
Office
32.1
35.2
Hotel
19.6
21.6
Multifamily
19.1
16.1
Mixed Use
12.2
6.7
Retail
Industrial
3.0
100.0
Geographic Location
U.S. Regions:
North East
20.5
22.7
West
20.0
19.0
South West
10.3
11.1
Mid Atlantic
9.7
9.5
South East
6.9
7.3
Midwest
4.5
International:
Europe/Australia
25.5
23.3
Bahamas/Bermuda
2.7
The following table sets forth the amount of each category of investments we owned within our Infrastructure Lending Segment as of March 31, 2021 and December 31, 2020 (dollars in thousands):
First priority infrastructure loans and HTM securities
1,664,665
1,633,491
1,186,526
446,965
Loans held-for-sale, infrastructure
73,287
16,081
(11,732)
1,754,266
1,735,967
476,154
1,488,614
1,458,880
1,140,608
318,272
5.2
100,155
20,385
3.5
(10,759)
1,609,514
1,593,756
352,993
As of March 31, 2021 and December 31, 2020, our Infrastructure Lending Segment’s investment portfolio had the following characteristics based on carrying values:
Collateral Type
Natural gas power
62.7
65.8
Midstream
20.8
21.9
Renewable power
9.4
9.0
Other thermal power
3.3
Downstream
0.5
41.4
43.1
22.5
14.5
15.3
9.6
Mid-Atlantic
Mexico
0.9
1.0
The following table sets forth the amount of each category of investments held within our Property Segment as of March 31, 2021 and December 31, 2020 (amounts in thousands):
Lease intangibles, net
37,080
38,511
1,991,960
2,007,925
The following table sets forth our net investment and other information regarding the Property Segment’s properties and lease intangibles as of March 31, 2021 (dollars in thousands):
Specific
Occupancy
Lease Term
Office—Medical Office Portfolio
760,266
592,853
167,413
93.6
5.8 years
Multifamily residential—Woodstar I Portfolio
636,740
572,784
63,956
98.8
0.5 years
Multifamily residential—Woodstar II Portfolio
610,558
512,588
97,970
99.1
Retail—Master Lease Portfolio
343,790
192,801
150,989
21.1 years
Subtotal—undepreciated carrying value
2,351,354
480,328
Accumulated depreciation and amortization
(359,394)
Net carrying value
120,934
As of March 31, 2021 and December 31, 2020, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:
62.1
7.9
88
The following table sets forth the amount of each category of investments we owned within our Investing and Servicing Segment as of March 31, 2021 and December 31, 2020 (amounts in thousands):
2,632,996
350,187
755,813
Intangible assets - servicing rights
55,324
14,583
Loans held-for-sale, fair value option, commercial
172,119
110,424
57,802
192,611
3,539
2,806,048
1,585,651
932,429
2,652,459
360,221
751,924
54,578
15,548
53,040
37,292
192,839
5,004
2,744,256
1,516,118
910,018
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Our REIS Equity Portfolio, as described in Note 6 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $195.6 million and $198.2 million as of March 31, 2021 and December 31, 2020, respectively:
Property Type
50.5
50.6
29.9
7.0
Self-storage
2.1
2.2
24.9
25.1
25.4
24.8
15.2
15.4
14.8
11.4
8.3
8.4
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, 2020.
Secured Borrowings
The following table is a summary of our secured borrowings as of March 31, 2021 (dollars in thousands):
Approved
but
Unallocated
Facility
Outstanding
Undrawn
Size
Balance
Capacity (b)
Amount (c)
144,018
3,427,855
1,421,380
253,864
238,913
154,372
5,496,384
426,698
120,129
128,356
102,995
701,044
(m)
24,552
(n)
120,000
Collateralized Loan Obligation
Jul 2038
LIBOR + 1.34%
5,095,299
6,589,854
4,966,080
240,129
1,383,645
15,168,115
19,177,744
384,147
6,880,029
(73,309)
Refer to Note 9 of the Condensed Consolidated Financial Statements for further disclosure regarding the terms of our secured financing arrangements.
Variance between Average and Quarter-End Credit Facility Borrowings Outstanding
The following table compares the average amount outstanding under our secured financing agreements during each quarter and the amount outstanding as of the end of each quarter, together with an explanation of significant variances (amounts in thousands):
Weighted-Average
Explanations
Quarter-End
Balance During
for Significant
Quarter Ended
Quarter
Variance
Variances
11,169,964
10,945,199
224,765
11,274,970
638,598
Borrowings under Unsecured Senior Notes
During the three months ended March 31, 2021 and 2020, the weighted average effective borrowing rate on our unsecured senior notes was 5.4% and 5.0%, respectively. The effective borrowing rate includes the effects of underwriter purchase discount and, during the 2020 period, the adjustment for the conversion option on the Convertible Notes, 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 unsecured senior notes.
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Scheduled Principal Repayments on Investments and Overhang on Financing Facilities
The following scheduled and/or projected principal repayments on our investments were based on amounts outstanding and extended contractual maturities of those investments as of March 31, 2021. The projected and/or required repayments of financing were based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):
Scheduled Principal
Scheduled/Projected
Projected/Required
Repayments on Loans
Principal Repayments
Repayments of
Inflows Net of
and HTM Securities
on RMBS and CMBS
Financing Outflows
Second Quarter 2021
731,009
10,927
(91,314)
650,622
Third Quarter 2021
55,560
9,598
(15,264)
49,894
Fourth Quarter 2021
295,918
7,085
(954,390)
(651,386)
First Quarter 2022
631,041
5,965
(1,000,898)
(363,892)
1,713,528
33,575
(2,061,866)
(314,762)
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, 2021, we had 100,000,000 shares of preferred stock available for issuance and 213,148,440 shares of common stock available for issuance.
Other Potential Sources of Financing
In the future, we may also use other sources of financing to fund the acquisition of our target assets and maturities of our unsecured senior notes, including other secured as well as unsecured forms of borrowing and sale of senior loan interests and other assets.
Leverage Policies
Our strategies with regards to use of leverage have not changed significantly since December 31, 2020. Refer to our Form 10-K for a description of our strategies regarding use of leverage.
Cash Requirements
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular
corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We generally intend to distribute substantially all of our taxable income (which does not necessarily equal our GAAP net income) to our stockholders each year, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Refer to our Form 10-K for a detailed dividend history.
The Company’s board of directors declared the following dividends during the three months ended March 31, 2021:
Declare Date
Contractual Obligations and Commitments
Our material contractual obligations and commitments as of March 31, 2021 are as follows (amounts in thousands):
Less than
More than
1 year
1 to 3 years
3 to 5 years
5 years
Secured financings (a)
675,327
1,960,570
5,355,964
2,985,332
Collateralized loan obligations
550,000
Future loan funding commitments:
Commercial Lending (b)
928,429
336,975
25,900
Infrastructure Lending (c)
192,515
163,211
29,304
The table above does not include interest payable, amounts due under our management agreement, amounts due under our derivative agreements or amounts due under guarantees as those contracts do not have fixed and determinable payments.
Our secured financings and collateralized loan obligations consist primarily of matched-term funding for our loans and investment securities and long-term mortgages on our owned properties. Repayments of such facilities are generally made from proceeds from maturities, prepayments or sales of such investments and operating cash flows from owned properties. In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.
Our unsecured senior notes are expected to be repaid from a combination of available cash on hand, approved but undrawn capacity under our secured financing agreements, and/or equity issuances or other potential sources of financing, as discussed above.
Our future funding commitments are expected to be primarily matched-term funded under secured financing agreements with any difference funded from available cash on hand or other potential sources of financing discussed above.
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Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time. The following discussion describes the critical accounting estimates that apply to our operations and require complex management judgment. This summary should be read in conjunction with a more complete discussion of our accounting policies included in Note 2 to the Condensed Consolidated Financial Statements.
As discussed in Note 2 to the Condensed Consolidated Financial Statements, ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our loans held-for-investment (“HFI”) and our held-to-maturity (“HTM”) debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities.
As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. Such determination also incorporates significant assumptions and estimates regarding, among other things, prepayments, future fundings and economic forecasts. See Note 4 to the Condensed Consolidated Financial Statements for further discussion of our methodologies.
Significant judgment is required when estimating future credit losses; therefore, actual results over time could be materially different. As of March 31, 2021, we held $12.7 billion of loans and HTM securities measured at amortized cost with expected future funding commitments of $1.4 billion. During the three months ended March 31, 2021, we recognized an immaterial credit loss provision and the related credit loss allowance was $81.5 million as of March 31, 2021. During the year ended December 31, 2020, we recognized a credit loss provision of $43.2 million and the related credit loss allowance was $89.2 million as of December 31, 2020.
Separate provisions of ASC 326 apply to our available-for-sale (“AFS”) debt securities which are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (“AOCI”). We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis.
Subsequently, cumulative adverse changes in expected cash flows on our available-for-sale debt securities are recognized currently as an increase to the credit loss allowance. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.
Significant judgment is required when estimating expected cash flows used in determining the credit loss allowance for AFS debt securities; therefore, actual results over time could be materially different. As of March 31, 2021, we held $160.3 million of AFS debt securities. We did not recognize any provision for credit losses with respect to our AFS debt securities during the three months ended March 31, 2021 or during the year ended December 31, 2020. There was no related credit loss allowance as of March 31, 2021 and December 31, 2020.
Valuation of Financial Assets and Liabilities Carried at Fair Value
We measure our VIE assets and liabilities, 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. See Note 19 to the Condensed Consolidated Financial Statements for details regarding the various methods and inputs we use in measuring the fair value of our financial assets and liabilities. As of March 31, 2021, we had $63.4 billion and $60.9 billion of financial assets and liabilities, respectively, that are measured at fair value, including $62.4 billion of VIE assets and $60.9 billion of VIE liabilities we consolidate pursuant to ASC 810.
We measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the VIE, we maximize the use of observable inputs over unobservable inputs. As a result, the methods and inputs we use in measuring the fair value of the assets and liabilities of our VIEs affect our earnings only to the extent of their impact on our direct investment in the VIEs.
Goodwill Impairment
Our goodwill at March 31, 2021 of $259.8 million represents the excess of consideration transferred over the fair value of net assets acquired in connection with the acquisitions of LNR in April 2013 and the Infrastructure Lending Segment in September 2018 and October 2018. In testing goodwill for impairment, we follow ASC 350, Intangibles—Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or we choose not to perform the qualitative assessment, then we compare the fair value of that reporting unit with its carrying value, including goodwill, in a quantitative assessment. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss measured as the excess of the reporting unit’s carrying value (inclusive of goodwill) over its fair value.
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Based on our qualitative assessment during the fourth quarter of 2020, we believe that the Investing and Servicing Segment reporting unit to which the LNR acquisition goodwill was attributed is not currently at risk of failing a quantitative assessment. This qualitative assessment required judgment to be applied in evaluating the effects of multiple factors, including actual and projected financial performance of the reporting unit, macroeconomic conditions, industry and market conditions, and relevant entity specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.
Based on our quantitative assessment during the fourth quarter of 2020, we determined that the fair value of the Infrastructure Lending Segment reporting unit to which goodwill is attributed exceeded its carrying value including goodwill. This quantitative assessment required judgment to be applied in determining the fair value of our equity in the Infrastructure Lending Segment, which included estimates of future cash flows, terminal equity multiple and market discount rate.
Refer to Note 2 to the Condensed Consolidated Financial Statements for a discussion of recent accounting developments and the expected impact to the Company.
Item 3. Quantitative and 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, as described in Item 7A of our Form 10-K, have not changed materially since December 31, 2020 except as described below.
Credit Risk
Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
We seek to further manage credit risk associated with our Investing and Servicing Segment loans held-for-sale through the purchase of credit index instruments. The following table presents our credit index instruments as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Face Value of
Aggregate Notional Value of
Number of
Loans Held-for-Sale
Credit Index Instruments
69,000
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match the interest rate characteristics of our investments with the interest rate characteristics of any related financing obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. In instances where the interest rate characteristics of an investment and the related financing obligation are not matched, we mitigate such interest rate risk through the utilization of interest rate derivatives of the same duration. The following
table presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related interest rate derivatives as of March 31, 2021 and December 31, 2020 (dollars in thousands):
Aggregate Notional
Value of Interest
Number of Interest
Hedged Instruments
Rate Derivatives
Instrument hedged as of March 31, 2021
607,144
977,600
85,000
115,867
71,000
16,015
Secured financing agreements
992,927
1,627,352
2,477,425
3,246,967
Instrument hedged as of December 31, 2020
911,596
557,000
421,000
125,985
16,554
1,008,909
1,633,357
2,815,782
3,168,911
The following table summarizes the estimated annual change in net investment income for our variable rate investments and our variable rate debt assuming increases or decreases in LIBOR or other applicable index rates and adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share data):
Variable rate
investments and
1.0%
0.5%
Income (Expense) Subject to Interest Rate Sensitivity
indebtedness (1)
Increase
Decrease
Investment income from variable rate investments
11,974,667
57,992
24,502
(4,237)
(4,364)
Interest expense from variable rate debt, net of interest rate derivatives
(8,276,358)
(86,390)
(41,759)
6,817
5,184
Net investment income from variable rate instruments
3,698,309
(28,398)
(17,257)
2,580
820
Impact per diluted shares outstanding
(0.10)
(0.06)
0.01
0.00
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 unavailable hedges to perfectly offset changes in future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges for the benefit of the hedge counterparty, which could adversely affect our liquidity.
Consistent with our strategy of hedging foreign currency exposure on certain investments, we typically enter into a series of forwards to fix the U.S. dollar amount of foreign currency denominated cash flows (interest income, 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.
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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, 2021 GBP closing rate of 1.3779, EUR closing rate of 1.1732 and AUD closing rate of 0.7596.
Carrying Value of Net Investment
Local Currency
Number of Foreign Exchange Contracts
Aggregate Notional Value of Hedges Applied
Expiration Range of Contracts
19,711
27,815
April 2021 – December 2023
92,555
90,654
April 2021 – August 2022
28,028
23,894
April 2021 – April 2022
33,842
39,181
July 2023
63,112
66,784
May 2021 – March 2023
52,105
66,054
May 2021 – May 2024
29,268
39,214
April 2021 – January 2024
3,742
7,991
April 2021 – October 2021
28,394
29,689
May 2021 – August 2022
117,487
163,832
60,286
84,765
April 2021 – August 2021
5,249
6,836
May 2021 – July 2022
4,126
23,430
119,154
165,834
August 2021 – November 2023
3,981
August 2021
24,876
30,283
May 2021 – June 2023
34,983
60,459
May 2021 – November 2022
40,898
49,445
June 2021 – November 2025
11,633
14,745
May 2021 – November 2023
62,708
68,007
May 2021 – November 2021
131,211
138,925
November 2021 – June 2022
17,218
19,097
June 2022 – April 2023
13,413
June 2021 – April 2022
995,222
1,234,648
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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 our 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, 2021.
Issuer Purchases of Equity Securities
There were no purchases of common stock during the three months ended March 31, 2021.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
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 906 of the Sarbanes-Oxley Act of 2002
32.2
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
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 6, 2021
By:
/s/ BARRY S. STERNLICHT
Barry S. Sternlicht Chief Executive Officer Principal Executive Officer
/s/ RINA PANIRY
Rina Paniry Chief Financial Officer, Treasurer, Chief Accounting Officer and Principal Financial Officer
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