STARWOOD PROPERTY TRUST, INC. 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 endedDecember 31, 2021 (our "Form 10-K"). This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements. See "Special Note Regarding Forward-Looking Statements" at the beginning of this Quarterly Report on Form 10-Q.
Overview
Starwood Property Trust, Inc. ("STWD" and, together with its subsidiaries, "we" or the "Company") is aMaryland corporation that commenced operations inAugust 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 inthe United States ("U.S."),Europe andAustralia . 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
•Real estate commercial and residential lending (the "Commercial and Residential
Lending Segment")-engages primarily in originating, acquiring, financing and
managing commercial first mortgages, non-agency residential mortgages
("residential loans"), subordinated mortgages, mezzanine loans, preferred
equity, commercial mortgage-backed securities ("CMBS"), residential
mortgage-backed securities ("RMBS") and other real estate and real
estate-related debt investments in the U.S. , Europe and Australia (including
distressed or non-performing loans). Our residential loans are secured by a
first mortgage lien on residential property and primarily consist of non-agency
residential loans that are not guaranteed by any U.S. Government agency or
federally chartered corporation.
•Infrastructure lending (the "Infrastructure Lending Segment")-engages primarily in originating, acquiring, financing and managing infrastructure debt investments.
•Real estate property (the "Property Segment")-engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multifamily properties and commercial properties subject to net leases, that are held for investment. •Real estate investing and servicing (the "Investing and Servicing Segment")-includes (i) a servicing business in theU.S. that manages and works out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts.
Our segments exclude the consolidation of securitization variable interest entities ("VIEs").
Refer to Note 1 of our condensed consolidated financial statements included herein (the "Condensed Consolidated Financial Statements") for further discussion of our business and organization.
67
--------------------------------------------------------------------------------
Tab le of Co ntents
Developments During the Third Quarter of 2022
Commercial and Residential Lending Segment
•Originated
•$324.2 million of first mortgage and mezzanine loans for the acquisition of a 1,684 unit portfolio of six multifamily properties located inFlorida ,Texas ,Tennessee ,South Carolina andGeorgia , of which the Company funded$305.3 million . •$282.9 million first mortgage and mezzanine loan to refinance the existing debt and fund construction of a multi-story industrial facility located inNew York , of which the Company funded$122.7 million .
•$226.0 million first mortgage and mezzanine loan for the acquisition and
refinancing of a 41-property, 4,967-key hotel portfolio located in
•A$122.0 million ($84.8 million ) first mortgage loan for the development and construction of a 17-story student housing tower located inAustralia , of which the Company funded$16.7 million .
•Funded
•Received gross proceeds of
•Sold a
Infrastructure Lending Segment
•Acquired
•Received proceeds of
Investing and Servicing Segment
•Originated commercial conduit loans of
•Received proceeds of
•Obtained eight new special servicing assignments for CMBS trusts with a total
unpaid principal balance of
•Sold commercial real estate for gross proceeds of
68
--------------------------------------------------------------------------------
Tab le of Co ntents
Developments During the Nine Months Ended
Commercial and Residential Lending Segment
•InFebruary 2022 , we refinanced a pool of our commercial loans held-for-investment through a collateralized loan obligation ("CLO"), STWD 2022-FL3. The CLO has a contractual maturity ofNovember 2038 and a weighted average cost of financing of SOFR + 1.91%, inclusive of the amortization of deferred issuance costs. On the closing date, the CLO issued$1.0 billion of notes and preferred shares, of which$842.5 million of notes were purchased by third party investors. We retained$82.5 million of notes, along with preferred shares with a liquidation preference of$75.0 million . The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash for a period of two years.
•Originated or acquired
•A$1.3 billion (
•$324.2 million of first mortgage and mezzanine loans for the acquisition of a 1,684 unit portfolio of six multifamily properties located inFlorida ,Texas ,Tennessee ,South Carolina andGeorgia , of which the Company funded$305.3 million . •$282.9 million first mortgage and mezzanine loan to refinance the existing debt and fund construction of a multi-story industrial facility located inNew York , of which the Company funded$122.7 million . •$263.6 million of first mortgage loans for the acquisition of a 1,828 unit portfolio of eight multifamily properties located inTexas , of which the Company funded$241.5 million .
•$250.0 million participation in a first mortgage loan for the construction of
235 luxury residences, a 136-key hotel and 78,000 square feet of commercial
space located in
•$226.0 million first mortgage and mezzanine loan for the acquisition and
refinancing of a 41-property, 4,967-key hotel portfolio located in
•$200.0 million first mortgage loan to refinance existing debt on a 22
property luxury cabin portfolio and finance the acquisition of 18 future
properties located across the
•€162.7 million ($186.2 million ) first mortgage loan for the acquisition of a 382,000 square foot office and retail property located inGermany , which the Company has not yet funded. •$174.1 million first mortgage loan for the acquisition and renovation of two garden-style multifamily properties located inFlorida , of which the Company funded$166.1 million . •$165.0 million first mortgage and mezzanine loan for the construction of a 65-story, 100% pre-sold residential project located inSouth Florida , of which the Company funded$17.8 million .
•Funded
•Received gross proceeds of
•Sold a
•Sold commercial real estate inFlorida that was previously acquired through foreclosure inApril 2019 for gross proceeds of$114.8 million and recognized a gain of$86.6 million .
•Entered into commercial credit facilities of
•Acquired
69
--------------------------------------------------------------------------------
Tab le of Co ntents
•Received proceeds of
•Amended certain of our residential loan repurchase facilities to increase available non-mark-to-market capacity by$250.0 million to$800.0 million . The margin call provisions under these facilities do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks.
Infrastructure Lending Segment
•InJanuary 2022 , we refinanced a pool of our infrastructure loans held-for-investment through a CLO, STWD 2021-SIF2. The CLO has a contractual maturity ofJanuary 2033 and a weighted average cost of financing of SOFR + 2.11%, inclusive of the amortization of deferred issuance costs. On the closing date, the CLO issued$500.0 million of notes and preferred shares, of which$410.0 million of notes was purchased by third party investors. We retained preferred shares with a liquidation preference of$90.0 million . The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash for a period of three years.
•Acquired
•Received proceeds of
•Entered into a credit facility with a maximum facility size of$500.0 million and a three-year revolving period with two one-year extension options. The margin call provisions under this facility do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks.
Investing and Servicing Segment
•Originated commercial conduit loans of
•Received proceeds of
•Acquired CMBS for a purchase price of
•Obtained 23 new special servicing assignments for CMBS trusts with a total
unpaid principal balance of
•Sold two operating properties for gross proceeds of
Corporate
•Issued
•Entered into aStarwood Property Trust, Inc. Common Stock Sales Agreement (the "ATM Agreement") with a syndicate of financial institutions to sell shares of the Company's common stock of up to$500.0 million from time to time, through an "at the market" equity offering program. During the nine months endedSeptember 30, 2022 , we issued 1.4 million shares under the ATM Agreement for gross proceeds of$33.3 million at an average share price of$23.54 .
Subsequent Events
Refer to Note 24 to the Consolidated Financial Statements for disclosure
regarding significant transactions that occurred subsequent to
70
--------------------------------------------------------------------------------
Tab le of Co ntents
Results of Operations
The discussion below is based on accounting principles generally accepted inthe United States of America ("GAAP") and therefore reflects the elimination of certain key financial statement line items related to the consolidation of securitization variable interest entities ("VIEs"), particularly within revenues and other income, as discussed in Note 2 to the Condensed Consolidated Financial Statements. For a discussion of our results of operations excluding the impact of Accounting Standards Codification ("ASC") Topic 810 as it relates to the consolidation of securitization VIEs, refer to the section captioned "Non-GAAP Financial Measures." The following table compares our summarized results of operations for the three months endedSeptember 30, 2022 andJune 30, 2022 and for the nine months endedSeptember 30, 2022 and 2021 by business segment (amounts in thousands): For the Three Months Ended For the Nine Months Ended September 30, September 30, September 30, Revenues: 2022 June 30, 2022 $ Change 2022 2021 $ Change Commercial and Residential Lending Segment$ 314,981 $ 251,393 $ 63,588 $ 791,554 $ 572,066 $ 219,488 Infrastructure Lending Segment 44,351 31,359 12,992 103,508 63,432 40,076 Property Segment 22,940 22,676 264 68,031 197,325 (129,294) Investing and Servicing Segment 50,147 52,811 (2,664) 160,767 154,492 6,275 Corporate - 3 (3) 3 - 3 Securitization VIE eliminations (41,878) (32,656) (9,222) (113,744) (106,932) (6,812) 390,541 325,586 64,955 1,010,119 880,383 129,736 Costs and expenses: Commercial and Residential Lending Segment 175,619 113,248 62,371 367,361 166,414 200,947 Infrastructure Lending Segment 33,133 19,249 13,884 67,570 39,341 28,229 Property Segment 24,153 21,446 2,707 66,016 183,643 (117,627) Investing and Servicing Segment 33,194 35,619 (2,425) 105,182 106,414 (1,232) Corporate 70,679 72,854 (2,175) 237,021 194,726 42,295 Securitization VIE eliminations (131) (118) (13) (382) (367) (15) 336,647 262,298 74,349 842,768 690,171 152,597 Other income (loss): Commercial and Residential Lending Segment (21,275) (122,744) 101,469 (86,935) 42,743 (129,678) Infrastructure Lending Segment 1,970 370 1,600 2,820 (535) 3,355 Property Segment 127,811 312,537 (184,726) 691,936 3,877 688,059 Investing and Servicing Segment 2,610 11,024 (8,414) 34,295 59,733 (25,438) Corporate (31,668) (13,183) (18,485) (82,019) (6,362) (75,657) Securitization VIE eliminations 41,741 32,619 9,122 113,410 106,107 7,303 121,189 220,623 (99,434) 673,507 205,563 467,944 Income (loss) before income taxes: Commercial and Residential Lending Segment 118,087 15,401 102,686 337,258 448,395 (111,137) Infrastructure Lending Segment 13,188 12,480 708 38,758 23,556 15,202 Property Segment 126,598 313,767 (187,169) 693,951 17,559 676,392 Investing and Servicing Segment 19,563 28,216 (8,653) 89,880 107,811 (17,931) Corporate (102,347) (86,034) (16,313) (319,037) (201,088) (117,949) Securitization VIE eliminations (6) 81 (87) 48 (458) 506 175,083 283,911 (108,828) 840,858 395,775 445,083 Income tax benefit (provision) 48,755 (2,206) 50,961 48,999 (6,378) 55,377 Net income attributable to non-controlling interests (29,276) (69,418) 40,142 (158,409) (33,107) (125,302) Net income attributable to Starwood Property Trust, Inc.$ 194,562 $ 212,287 $ (17,725) $ 731,448 $ 356,290 $ 375,158 71
--------------------------------------------------------------------------------
Tab le of Co ntents
Three Months Ended
Commercial and Residential Lending Segment
Revenues
For the three monthsSeptember 30, 2022 , revenues of our Commercial and Residential Lending Segment increased$63.6 million to$315.0 million , compared to$251.4 million for the three months endedJune 30, 2022 . This increase was primarily due to an increase in interest income from loans of$56.6 million and investment securities of$6.0 million . The increase in interest income from loans reflects (i) a$58.3 million increase from commercial loans reflecting higher average index rates and loan balances partially offset by lower prepayment related income and (ii) a$1.7 million decrease from residential loans principally due to lower average loan balances partially offset by higher average coupon rates. The increase in interest income from investment securities was primarily due to higher average index rates on commercial investments and higher RMBS investment balances and yields.
Costs and Expenses
For the three months endedSeptember 30, 2022 , costs and expenses of our Commercial and Residential Lending Segment increased$62.4 million to$175.6 million , compared to$113.2 million for the three months endedJune 30, 2022 . This increase was primarily due to a$56.9 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment's investment portfolio. The increase in interest expense was primarily due to higher average index rates and borrowings outstanding.
Net Interest Income (amounts in thousands)
For the Three Months Ended
September 30,
2022 June 30, 2022 Change
Interest income from loans $ 284,197 $ 227,555 $ 56,642
Interest income from investment securities 28,560 22,591 5,969
Interest expense (145,107) (88,226) (56,881)
Net interest income $ 167,650 $ 161,920 $ 5,730
For the three months ended September 30, 2022 , net interest income of our
Commercial and Residential Lending Segment increased $5.7 million to $167.6
million , compared to $161.9 million for the three months ended June 30, 2022 .
This increase reflects the increase in interest income, partially offset by the
increase in interest expense on our secured financing facilities, both as
discussed in the sections above.
During the three months ended September 30, 2022 and June 30, 2022 , the weighted
average unlevered yields on the Commercial and Residential Lending Segment's
loans and investment securities, excluding retained RMBS and loans for which
interest income is not recognized, were as follows:
For the Three Months Ended
September 30, 2022 June 30, 2022
Commercial 6.7 % 5.4 %
Residential 4.9 % 4.8 %
Overall 6.5 % 5.4 %
The weighted average unlevered yield on our commercial loans increased primarily
due to higher average index rates partially offset by lower prepayment related
income. The weighted average unlevered yield on our residential loans increased
slightly primarily due to higher average coupon rates.
During the three months ended September 30, 2022 and June 30, 2022 , 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 4.3% and 2.9%, respectively. The increase in borrowing
rates primarily reflects higher index rates.
Other Loss
For the three months endedSeptember 30, 2022 , other loss of our Commercial and Residential Lending Segment decreased$101.4 million to$21.3 million compared to$122.7 million for the three months endedJune 30, 2022 . This decrease was primarily due to (i) a$93.1 million increase in net gains on derivatives, (ii) a$35.7 million favorable change in fair value of investment securities, principally related to RMBS, and (iii) a$31.2 million lesser decrease in fair value of residential loans, 72
--------------------------------------------------------------------------------
Tab le of Co ntents
partially offset by (iv) a$28.8 million increase in foreign currency loss and (v) a$23.0 million higher loss contingency provision related to residential loans sold inFebruary 2022 (refer to Note 22 to the Condensed Consolidated Financial Statements). The increase in net gains on derivatives in the third quarter of 2022 reflects a$56.3 million increased gain on interest rate swaps principally related to residential loans and a$36.8 million increased gain on foreign currency hedges. The interest rate swaps are used primarily to hedge our interest rate risk on residential loans held-for-sale and to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. The foreign currency hedges are used to fix theU.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The increased gain on foreign currency hedges and the increase in foreign currency loss reflect the strengthening of theU.S. dollar against the pound sterling ("GBP"), Euro ("EUR") and Australian dollar ("AUD") in the third quarter of 2022 compared to a lesser strengthening of theU.S. dollar against those currencies in the second quarter of 2022.
Infrastructure Lending Segment
Revenues
For the three months endedSeptember 30, 2022 , revenues of our Infrastructure Lending Segment increased$13.0 million to$44.4 million , compared to$31.4 million for the three months endedJune 30, 2022 . This was primarily due to an increase in interest income from loans of$12.9 million reflecting higher average index rates and loan balances.
Costs and Expenses
For the three months endedSeptember 30, 2022 , costs and expenses of our Infrastructure Lending Segment increased$13.9 million to$33.1 million , compared to$19.2 million for the three months endedJune 30, 2022 . The increase was primarily due to a$7.5 million increase in interest expense associated with the various secured financing facilities used to fund this segment's investment portfolio and a$6.4 million increase in credit loss provision. The increase in interest expense was primarily due to higher average index rates and borrowings outstanding. The increase in the credit loss provision was primarily due to an increase in the specific reserve for a credit-deteriorated loan.
Net Interest Income (amounts in thousands)
For the Three Months Ended
September 30,
2022 June 30, 2022 Change
Interest income from loans $ 43,018 $ 30,096 $ 12,922
Interest income from investment securities 1,204 1,173 31
Interest expense (22,500) (15,001) (7,499)
Net interest income $ 21,722 $ 16,268 $ 5,454
For the three months ended September 30, 2022 , net interest income of our
Infrastructure Lending Segment increased $5.4 million to $21.7 million , compared
to $16.3 million for the three months ended June 30, 2022 . The increase reflects
the increase in interest income, partially offset by the increase in interest
expense on the secured financing facilities, both as discussed in the sections
above.
During the three months ended
During the three months ended
73
--------------------------------------------------------------------------------
Tab le of Co ntents
Other Income
For the three months ended
Property Segment
Change in Results by Portfolio (amounts in thousands)
$ Change from prior period
Gain (loss) on
derivative Income (loss)
Costs and financial Other income before
Revenues expenses instruments (loss) income taxes
Master Lease Portfolio $ - $ 17 $ - $ - $ (17)
Medical Office Portfolio 264 2,763 4,907 - 2,408
Woodstar Fund - (11) - (189,636) (189,625)
Other/Corporate - (62) - 3 65
Total $ 264 $ 2,707 $ 4,907 $ (189,633) $ (187,169) See Notes 6 and 7 to the Condensed Consolidated Financial Statements for a description of the above-referenced Property Segment portfolios and fund.
Revenues
For the three months endedSeptember 30, 2022 , revenues of our Property Segment increased$0.2 million to$22.9 million , compared to$22.7 million for the three months endedJune 30, 2022 . Costs and Expenses For the three months endedSeptember 30, 2022 , costs and expenses of our Property Segment increased$2.7 million to$24.1 million , compared to$21.4 million for the three months endedJune 30, 2022 . The increase is primarily due to an increase of$2.2 million in interest expense reflecting higher index rates on variable rate borrowings. Other Income For the three months endedSeptember 30, 2022 , other income of our Property Segment decreased$184.7 million to$127.8 million compared to$312.5 million for the three months endedJune 30, 2022 . The decrease is primarily due to (i) a$189.6 million decrease in income attributable to investments of theWoodstar Fund , reflecting lower unrealized increases in fair value during the third quarter of 2022, partially offset by (ii) a$4.9 million increased gain on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio.
Investing and Servicing Segment
Revenues
For the three months endedSeptember 30, 2022 , revenues of our Investing and Servicing Segment decreased$2.7 million to$50.1 million , compared to$52.8 million for the three months endedJune 30, 2022 . The decrease primarily reflects a$7.2 million decrease in servicing and other fees, partially offset by a$4.2 million net increase in interest income reflecting higher recoveries on CMBS investments but reduced interest on lower average balances of conduit loans. Costs and Expenses
For the three months ended
Other Income
For the three months endedSeptember 30, 2022 , other income of our Investing and Servicing Segment decreased$8.4 million to$2.6 million , compared to$11.0 million for the three months endedJune 30, 2022 . The decrease in other income was primarily due to (i) a$13.3 million greater decrease in fair value of CMBS investments, (ii) a$5.2 million lesser increase in fair 74
--------------------------------------------------------------------------------
Tab le of Co ntents
value of conduit loans and (iii) a$2.2 million decrease in net gains on derivatives which primarily hedge our interest rate risk on conduit loans and CMBS investments, all partially offset by (iv) a$13.7 million gain on sale of an operating property in the third quarter of 2022.
Corporate and Other Items
Corporate Costs and Expenses
For the three months endedSeptember 30, 2022 , corporate expenses decreased$2.2 million to$70.7 million , compared to$72.9 million for the three months endedJune 30, 2022 . This decrease was primarily due to (i) a decrease of$4.2 million in management fees principally due to lower incentive fees and (ii) a$1.0 million decrease in general and administrative expenses reflecting lower project related professional fees, partially offset by (iii) a$3.0 million increase in interest expense attributable to higher index rates on our term loan.
Corporate Other Loss
For the three months endedSeptember 30, 2022 , corporate other loss increased$18.5 million to$31.7 million , compared to$13.2 million for the three months endedJune 30, 2022 . This increase was due to a greater loss on our fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes.
Securitization VIE Eliminations
Securitization VIE eliminations primarily reclassify interest income and servicing fee revenues to other income (loss) for the CMBS and RMBS VIEs that we consolidate as primary beneficiary. Such eliminations have no overall effect on net income (loss) attributable toStarwood Property Trust . The reclassified revenues, along with applicable changes in fair value of investment securities and servicing rights, comprise the other income (loss) caption "Change in net assets related to consolidated VIEs," which represents our beneficial interest in those consolidated VIEs. The magnitude of the securitization VIE eliminations is merely a function of the number of CMBS and RMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of operating results. The eliminations primarily relate to CMBS trusts for which the Investing and Servicing Segment is deemed the primary beneficiary and, to a much lesser extent, some CMBS and RMBS trusts for which the Commercial and Residential Lending Segment is deemed the primary beneficiary.
Income Tax Benefit (Provision)
Our consolidated income taxes principally relate to the taxable nature of our
loan servicing and loan securitization businesses which are housed in taxable
REIT subsidiaries ("TRSs"). For the three months ended September 30, 2022 , our
income tax provision decreased $51.0 million to a benefit of $48.8 million
compared to a provision of $2.2 million for the three months ended June 30, 2022
due to tax losses of our TRSs in the third quarter of 2022 and use of the
discrete method compared to taxable income of our TRSs in the second quarter of
2022 and use of the annual effective tax rate method. The tax losses in the
third quarter of 2022 were primarily attributable to net unrealized losses on
our residential loans.
Net Income Attributable to Non-controlling Interests
During the three months endedSeptember 30, 2022 , net income attributable to non-controlling interests decreased$40.1 million to$29.3 million , compared to$69.4 million during the three months endedJune 30, 2022 . The decrease was primarily due to non-controlling interests in lower income of theWoodstar Fund in the third quarter of 2022. 75
--------------------------------------------------------------------------------
Tab le of Co ntents
Nine Months Ended
Commercial and Residential Lending Segment
Revenues
For the nine months endedSeptember 30, 2022 , revenues of our Commercial and Residential Lending Segment increased$219.5 million to$791.6 million , compared to$572.1 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to increases in interest income from loans of$198.4 million and investment securities of$20.4 million . The increase in interest income from loans reflects (i) a$155.8 million increase from commercial loans, reflecting higher average balances and index rates, partially offset by the timing effect of certain loans being placed on nonaccrual, and (ii) a$42.6 million increase from residential loans principally due to higher average balances reflecting the timing of purchases and securitizations, partially offset by lower average coupon rates. The increase in interest income from investment securities was primarily due to higher commercial and RMBS average investment balances and the effect of higher index rates on certain commercial investments.
Costs and Expenses
For the nine months endedSeptember 30, 2022 , costs and expenses of our Commercial and Residential Lending Segment increased$201.0 million to$367.4 million , compared to$166.4 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to (i) a$157.2 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment's investment portfolio, (ii) a$26.0 million increase in credit loss provision from a reversal of$13.0 million in the nine months of 2021 to a provision of$13.0 million in nine months of 2022 and (iii) a$9.0 million increase in primarily legal related general and administrative expenses. The increase in interest expense was primarily due to higher average borrowings outstanding and higher average index rates. The credit loss provision in the nine months of 2022 was primarily due to rising index rates and its potential effect on borrower cash flows in our estimate of current expected credit losses ("CECL").
Net Interest Income (amounts in thousands)
For the Nine Months Ended
September 30,
2022 2021 Change
Interest income from loans $ 714,222 $ 515,776 $ 198,446
Interest income from investment securities 71,987 51,618 20,369
Interest expense (301,935) (144,717) (157,218)
Net interest income $ 484,274 $ 422,677 $ 61,597 For the nine months ended
During the nine months endedSeptember 30, 2022 and 2021, the weighted average unlevered yields on the Commercial and Residential Lending Segment's loans and investment securities, excluding retained RMBS and loans for which interest income is not recognized, were as follows: For the Nine Months Ended September 30, 2022 2021 Commercial 5.9 % 5.9 % Residential 4.6 % 5.2 % Overall 5.7 % 5.9 % The weighted average unlevered yield on our commercial loans remained unchanged despite higher index rates primarily due to repayment of loans with higher LIBOR floors being replaced by newer loans with lower floating rate floors. The unlevered yield on our residential loans decreased due to lower weighted average coupons which resulted from market spread tightening as well as a change in the composition of our residential loan portfolio to include agency loans which generally carry a lower coupon than non-agency loans. 76
--------------------------------------------------------------------------------
Tab le of Co ntents
During the nine months endedSeptember 30, 2022 and 2021, the Commercial and Residential Lending Segment's weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.3% and 2.5%, respectively. The increase in borrowing rates primarily reflects higher index rates, partially offset by decreases in weighted average spreads particularly due to increased use of lower cost CLO financing. Other Income (Loss) For the nine months endedSeptember 30, 2022 , other income of our Commercial and Residential Lending Segment decreased$129.6 million to a loss of$86.9 million , compared to income of$42.7 million for the nine months endedSeptember 30, 2021 . This decrease primarily reflects (i) a$351.8 million unfavorable change in fair value of residential loans, (ii) a$177.0 million increase in foreign currency loss and (iii) an$88.4 million estimated loss contingency related to residential loans sold inFebruary 2022 (refer to Note 22 to the Condensed Consolidated Financial Statements), all partially offset by (iv) a$406.6 million increase in net gains on derivatives and (v) a$69.8 million increased gain on sale of foreclosed properties. The unfavorable change in fair value of residential loans was principally related to a rapid rise in interest rates and widening of credit spreads in the nine months of 2022, which resulted in mark-to-market losses on our fixed coupon residential loans. The increased gains on derivatives during the nine months endedSeptember 30, 2022 reflect a$209.2 million increased gain on interest rate swaps principally related to residential loans, which partially offsets the unfavorable change in fair value of those loans, and a$197.4 million increased gain on foreign currency hedges. The interest rate swaps are used primarily to hedge our interest rate risk on residential loans held-for-sale and to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. The foreign currency hedges are used to fix theU.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The increased gain on foreign currency hedges and the increase in foreign currency loss reflect the strengthening of theU.S. dollar against the GBP, EUR and AUD during the nine months of 2022 compared to a lesser overall strengthening of theU.S. dollar against those currencies during the nine months of 2021.
Infrastructure Lending Segment
Revenues
For the nine months endedSeptember 30, 2022 , revenues of our Infrastructure Lending Segment increased$40.1 million to$103.5 million , compared to$63.4 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to an increase in interest income from loans of$38.6 million , principally due to higher average loan balances and index rates.
Costs and Expenses
For the nine months endedSeptember 30, 2022 , costs and expenses of our Infrastructure Lending Segment increased$28.3 million to$67.6 million , compared to$39.3 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to (i) a$21.5 million increase in interest expense associated with the various secured financing facilities used to fund this segment's investment portfolio and (ii) a$6.5 million increase in credit loss provision. The increase in interest expense was primarily due to higher average borrowings outstanding and higher average index rates. The increase in the credit loss provision was primarily due to an increase in the specific reserve for a credit-deteriorated loan.
Net Interest Income (amounts in thousands)
For the Nine Months Ended
September 30,
2022 2021 Change
Interest income from loans $ 100,097 $ 61,545 $ 38,552
Interest income from investment securities 3,124 1,659 1,465
Interest expense (49,431) (27,916) (21,515)
Net interest income $ 53,790 $ 35,288 $ 18,502 For the nine months ended
77
--------------------------------------------------------------------------------
Tab le of Co ntents
During the nine months endedSeptember 30, 2022 and 2021, the weighted average unlevered yields on the Infrastructure Lending Segment's loans and investment securities held-for-investment were 5.9% and 4.9%, respectively. During the nine months endedSeptember 30, 2021 , the weighted average unlevered yield on the Infrastructure Lending Segment's loans held-for-sale was 2.8%. There were no loans held-for-sale during the nine months endedSeptember 30, 2022 . During the nine months endedSeptember 30, 2022 and 2021, the Infrastructure Lending Segment's weighted average secured borrowing rates, inclusive of the amortization of deferred financing fees, were 3.6% and 2.8%, respectively.
Other Income (Loss)
For the nine months endedSeptember 30, 2022 and 2021, other income of our Infrastructure Lending Segment increased$3.3 million to income of$2.8 million , compared to a loss of$0.5 million for the nine months endedSeptember 30, 2021 . The increase primarily reflects a$2.6 million increase in earnings from an unconsolidated entity and a$0.8 million lower loss on extinguishment of debt.
Property Segment
Change in Results by Portfolio (amounts in thousands)
$ Change from prior period
Gain (loss) on
derivative Income (loss)
Costs and financial Other income before
Revenues expenses instruments (loss) income taxes
Master Lease Portfolio $ - $ (34) $ - $ - $ 34
Medical Office Portfolio 87 2,849 29,184 - 26,422
Woodstar I Portfolio (74,557) (67,750) (55) - (6,862)
Woodstar II Portfolio (54,824) (52,943) - 141 (1,740)
Woodstar Fund - 1,507 - 658,733 657,226
Other/Corporate - (1,256) - 56 1,312
Total $ (129,294) $ (117,627) $ 29,129 $ 658,930 $ 676,392
Revenues
For the nine months ended September 30, 2022 , revenues of our Property Segment
decreased $129.3 million to $68.0 million , compared to $197.3 million for the
nine months ended September 30, 2021 . The decrease is primarily due to the
conversion of the Woodstar Portfolios to the Woodstar Fund on November 5, 2021 .
Costs and Expenses
For the nine months endedSeptember 30, 2022 , costs and expenses of our Property Segment decreased$117.6 million to$66.0 million , compared to$183.6 million for the nine months endedSeptember 30, 2021 , primarily due to theWoodstar Fund conversion referred to above. Other Income For the nine months endedSeptember 30, 2022 , other income of our Property Segment increased$688.0 million to$691.9 million , compared to$3.9 million for the nine months endedSeptember 30, 2021 . The increase is primarily due to (i)$658.7 million of income attributable to investments of theWoodstar Fund , including$613.0 million of unrealized increases in fair value, during the nine months of 2022 and (ii) a$29.1 million increased gain on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio
Investing and Servicing Segment
Revenues
For the nine months endedSeptember 30, 2022 , revenues of our Investing and Servicing Segment increased$6.3 million to$160.8 million , compared to$154.5 million for the nine months endedSeptember 30, 2021 . The increase in revenues was primarily due to (i) a$7.2 million increase in interest income from CMBS investments and conduit loans and (ii) a$7.9 million increase in other fee income related to the origination of certain loans contributed into CMBS transactions, partially 78
--------------------------------------------------------------------------------
Tab le of Co ntents
offset by (iii) a
Costs and Expenses
For the nine months ended
Other Income
For the nine months endedSeptember 30, 2022 , other income of our Investing and Servicing Segment decreased$25.4 million to$34.3 million , compared to$59.7 million for the nine months endedSeptember 30, 2021 . The decrease in other income was primarily due to (i) a$43.0 million lesser increase in fair value of conduit loans and (ii) a$36.3 million greater decrease in fair value of CMBS investments, partially offset by (iii) a$36.2 million increased gain on derivatives which primarily hedge our interest rate risk on conduit loans and CMBS investments and (iv) a$15.9 million increased gain on sales of operating properties. Corporate and Other Items Corporate Costs and Expenses For the nine months endedSeptember 30, 2022 , corporate expenses increased$42.3 million to$237.0 million , compared to$194.7 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to increases of (i)$21.9 million in management fees, primarily reflecting higher incentive fees principally related to operating property sales, and (ii)$19.2 million in interest expense on higher average outstanding term loan and unsecured senior note balances, as well as higher index rates on our term loan.
Corporate Other Loss
For the nine months endedSeptember 30, 2022 , corporate other loss increased$75.6 million to$82.0 million , compared to$6.4 million for the nine months endedSeptember 30, 2021 . This increase was primarily due to a greater loss on fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes.
Securitization VIE Eliminations
Refer to the preceding comparison of the three months ended
Income Tax Benefit (Provision)
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in TRSs. For the nine months endedSeptember 30, 2022 , our income taxes decreased$55.4 million to a benefit of$49.0 million , compared to a provision of$6.4 million for the nine months endedSeptember 30, 2021 due to tax losses of our TRSs in the nine months of 2022 compared to taxable income of our TRSs in the nine months of 2021. The tax losses in the nine months of 2022 were primarily attributable to net unrealized losses on our residential loans.
Net Income Attributable to Non-controlling Interests
For the nine months endedSeptember 30, 2022 , net income attributable to non-controlling interests increased$125.3 million to$158.4 million , compared to$33.1 million for the nine months endedSeptember 30, 2021 . The increase was primarily due to non-controlling interests in earnings of theWoodstar Fund during the nine months of 2022. 79
--------------------------------------------------------------------------------
Tab le of Co ntents
Non-GAAP Financial Measures
Distributable Earnings is a non-GAAP financial measure. We calculate Distributable Earnings as GAAP net income (loss) excluding the following:
(i)non-cash equity compensation expense;
(ii)incentive fees due under our management agreement;
(iii)depreciation and amortization of real estate and associated intangibles;
(iv)acquisition costs associated with successful acquisitions;
(v)any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period; and
(vi)any deductions for distributions payable with respect to equity securities of subsidiaries issued in exchange for properties or interests therein.
The CECL reserve has been excluded from Distributable Earnings consistent with
other unrealized gains (losses) pursuant to our existing policy for reporting
Distributable Earnings. We expect to only recognize such potential credit losses
in Distributable Earnings if and when such amounts are deemed nonrecoverable
upon a realization event. This is generally at the time a loan is repaid, or in
the case of foreclosure, when the underlying asset is sold, but
non-recoverability may also be determined if, in our determination, it is nearly
certain that all amounts due will not be collected. The realized loss amount
reflected in Distributable Earnings will equal the difference between the cash
received, or expected to be received, and the book value of the asset, and is
reflective of our economic experience as it relates to the ultimate realization
of the loan.
We believe that Distributable Earnings provides meaningful information to
consider in addition to our net income (loss) and cash flow from operating
activities determined in accordance with GAAP. As a REIT, we generally must
distribute annually at least 90% of our REIT 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. 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. 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.
As discussed in Note 2 to the Consolidated Financial Statements, consolidation
of securitization variable interest entities ("VIEs") results in the elimination
of certain key financial statement line items, particularly within revenues and
other income, including unrealized changes in fair value of loans and investment
securities. These line items are essential to understanding the true financial
performance of our business segments and the Company as a whole. For this
reason, as referenced in Note 2 to our Condensed Consolidated Financial
Statements, we present business segment data in Note 23 without consolidation of
these VIEs. This is how we manage our business and is the basis for all data
reviewed with our board of directors, investors and analysts. This presentation
also allows for a more transparent reconciliation of the unrealized gain (loss)
adjustments below to the segment data presented in Note 23.
The weighted average diluted share count applied to Distributable Earnings for
purposes of determining Distributable Earnings per share ("EPS") is computed
using the GAAP diluted share count, adjusted for the following:
(i)Unvested stock awards - Currently, unvested stock awards are excluded from
the denominator of GAAP EPS. The related compensation expense is also excluded
from Distributable Earnings. In order to effectuate dilution from these awards
in the Distributable Earnings computation, we adjust the GAAP diluted share
count to include these shares.
80
--------------------------------------------------------------------------------
Tab le of Co ntents
(ii)Convertible Notes - Conversion of our Convertible Notes is an event that is contingent upon numerous factors, none of which are in our control, and is an event that may or may not occur. Consistent with the treatment of other unrealized adjustments to Distributable Earnings, we adjust the GAAP diluted share count to exclude the potential shares issuable upon conversion until a conversion occurs. (iii)Subsidiary equity - The intent of aFebruary 2018 amendment to our management agreement (the "Amendment") is to treat subsidiary equity in the same manner as if parent equity had been issued. The Class A Units issued in connection with the acquisition of assets in our Woodstar II Portfolio are currently excluded from our GAAP diluted share count, with the subsidiary equity represented as non-controlling interests in consolidated subsidiaries on our GAAP balance sheet. Consistent with the Amendment, we adjust GAAP diluted share count to include these subsidiary units. The following table presents our diluted weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Distributable EPS calculation (amounts in thousands): For the Three Months Ended For the Nine Months Ended September 30, 2022 June 30, 2022 September 30, 2022 September 30, 2021 Diluted weighted average shares - GAAP EPS 316,575 314,962 314,741 294,393 Add: Unvested stock awards 3,210 3,486 3,464 4,274 Add: Woodstar II Class A Units 9,773 9,773 9,773
10,282
Less: Convertible Notes dilution (9,649) (9,649) (9,649)
(9,649)
Diluted weighted average shares - Distributable EPS 319,909 318,572 318,329 299,300
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 nine months ended
The following table summarizes our quarterly Distributable Earnings per weighted average diluted share for the nine months endedSeptember 30, 2022 and 2021: Distributable Earnings For the Three-Month Periods Ended March 31, June 30, September 30, 2022 $ 0.76 $ 0.51 $ 0.51 2021 0.50 0.51 0.52 81
--------------------------------------------------------------------------------
Tab {{le of Co ntents
The following table presents our summarized results of operations and
reconciliation to Distributable Earnings for the three months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 314,981 $ 44,351 $ 22,940 $ 50,147 $ - $ 432,419
Costs and expenses (175,619) (33,133) (24,153) (33,194) (70,679) (336,778)
Other income (loss) (21,275) 1,970 127,811 2,610 (31,668)
79,448
Income (loss) before income taxes 118,087 13,188 126,598 19,563 (102,347)
175,089
Income tax benefit (provision) 53,099 2 - (4,346) -
48,755
Income attributable to non-controlling interests (3) - (28,486) (793) -
(29,282)
Net income (loss) attributable to Starwood Property Trust, Inc. 171,183 13,190 98,112 14,424 (102,347)
194,562
Add / (Deduct): Non-controlling interests attributable to Woodstar II Class A Units - - 4,691 - -
4,691
Non-controlling interests attributable to unrealized gains/losses - - 21,111 (4,019) -
17,092
Non-cash equity compensation expense 1,660 338 75 1,458 6,172 9,703 Management incentive fee - - - - 895 895 Acquisition and investment pursuit costs (22) - (82) - -
(104)
Depreciation and amortization 1,728 90 8,232 2,841 -
12,891
Interest income adjustment for securities 1,280 - - 2,746 - 4,026 Extinguishment of debt, net - - - - (246) (246) Consolidated income tax benefit associated with fair value adjustments (53,099) (2) - 4,346 - (48,755) Other non-cash items 55,522 - 344 76 - 55,942 Reversal of GAAP unrealized and realized (gains) / losses on: (1) Loans 90,159 - - (2,685) - 87,474 Credit loss provision, net 8,401 6,942 - - - 15,343 Securities (16,398) - - 21,412 - 5,014 Woodstar Fund investments - - (117,527) - - (117,527) Derivatives (220,296) (331) (10,262) (6,849) 31,668 (206,070) Foreign currency 107,087 253 (22) - - 107,318 Loss (earnings) from unconsolidated entities 4,044 (1,892) - (602) - 1,550 Sales of properties - - - (13,741) - (13,741) Recognition of Distributable realized gains / (losses) on: Loans (2) (470) - - 3,078 - 2,608 Securities (4) (1) - - (5,341) - (5,342) Woodstar Fund investments (5) - - 14,855 - - 14,855 Derivatives (6) 9,144 18 1,345 2,923 (1,109) 12,321 Foreign currency (7) (2,579) (57) 22 - - (2,614) (Loss) earnings from unconsolidated entities (8) (3,846) 1,893 - 913 - (1,040) Sales of properties (9) - - - 12,424 - 12,424 Distributable Earnings (Loss)$ 153,497 $
20,442
$ 163,270 Distributable Earnings (Loss) per Weighted Average Diluted Share$ 0.48 $ 0.06$ 0.07 $ 0.10$ (0.20) $ 0.51 82
--------------------------------------------------------------------------------
Tab le of Co ntents
The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months endedJune 30, 2022 , by business segment (amounts in thousands, except per share data). Refer to the footnotes following the Distributable Earnings reconciliation table for the nine months endedSeptember 30, 2021 . Commercial and Residential Infrastructure Investing Lending Lending Property and Servicing Segment Segment Segment Segment Corporate Total Revenues$ 251,393 $ 31,359 $ 22,676 $ 52,811 $ 3 $ 358,242 Costs and expenses (113,248) (19,249) (21,446) (35,619) (72,854)
(262,416)
Other income (loss) (122,744) 370 312,537 11,024 (13,183)
188,004
Income (loss) before income taxes 15,401 12,480 313,767 28,216 (86,034)
283,830
Income tax (provision) benefit (557) 1 - (1,650) -
(2,206)
Income attributable to non-controlling interests (4) - (67,482) (1,851) -
(69,337)
Net income (loss) attributable to Starwood Property Trust, Inc. 14,840 12,481 246,285 24,715 (86,034)
212,287
Add / (Deduct): Non-controlling interests attributable to Woodstar II Class A Units - - 4,691 - -
4,691
Non-controlling interests attributable to unrealized gains/losses - - 60,043 (1,910) -
58,133
Non-cash equity compensation expense 2,036 345 76 1,424 6,026 9,907 Management incentive fee - - - - 5,271 5,271 Acquisition and investment pursuit costs (39) - (82) - -
(121)
Depreciation and amortization 1,229 96 8,250 2,895 -
12,470
Interest income adjustment for securities 2,573 - - 3,723 - 6,296 Extinguishment of debt, net - - - - (247) (247) Other non-cash items 32,666 - 336 80 - 33,082 Reversal of GAAP unrealized and realized (gains) / losses on: (1) Loans 121,356 - - (7,876) - 113,480 Credit loss provision, net 7,925 513 - - - 8,438 Securities 19,312 - - 8,150 - 27,462 Woodstar Fund investments - - (307,165) - - (307,165) Derivatives (127,140) (265) (5,354) (9,007) 13,183 (128,583) Foreign currency 78,331 289 (18) - - 78,602 Earnings from unconsolidated entities (2,786) (394) - (1,748) -
(4,928)
Recognition of Distributable realized gains / (losses) on: Loans (2) (36,343) - - 7,753 - (28,590) Securities (4) (333) - - (4,413) - (4,746) Woodstar Fund investments (5) - - 15,175 - - 15,175 Derivatives (6) 38,905 (25) (788) 7,436 2,510 48,038 Foreign currency (7) (2,117) (31) 18 - - (2,130) Earnings from unconsolidated entities (8) 2,903 394 - 2,375 -
5,672
Distributable Earnings (Loss)$ 153,318 $
13,403
$ 162,494 Distributable Earnings (Loss) per Weighted Average Diluted Share$ 0.48 $ 0.04$ 0.07 $ 0.11$ (0.19) $ 0.51 83
--------------------------------------------------------------------------------
Tab le of Co ntents
Three Months Ended
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment's Distributable Earnings increased by$0.2 million , from$153.3 million during the second quarter of 2022 to$153.5 million in the third quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$316.4 million , costs and expenses were$164.0 million , other income was$1.1 million and there was no income tax provision. Revenues, consisting principally of interest income on loans, increased by$62.3 million in the third quarter of 2022, primarily due to an increase in interest income from loans of$56.6 million and investment securities of$4.7 million . The increase in interest income from loans reflects (i) a$58.3 million increase from commercial loans, reflecting higher average index rates and loan balances partially offset by lower prepayment related income and (ii) a$1.7 million decrease from residential loans principally due to lower average loan balances partially offset by higher average coupon rates. The increase in interest income from investment securities was primarily due to higher average index rates on commercial investments and higher RMBS investment balances and yields.
Costs and expenses increased by
Other income decreased by
Income taxes, which principally relate to the taxable nature of this segment's residential loan securitization activities which are housed in TRSs, decreased$0.6 million in the third quarter of 2022.
Infrastructure Lending Segment
The Infrastructure Lending Segment's Distributable Earnings increased by$7.0 million , from$13.4 million during the second quarter of 2022 to$20.4 million in the third quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$44.3 million , costs and expenses were$25.8 million and other income was$1.9 million . Revenues, consisting principally of interest income on loans, increased by$13.0 million in the third quarter of 2022, primarily due to an increase in interest income from loans of$12.9 million reflecting higher average index rates and loan balances.
Costs and expenses increased by
Other income increased by
Property Segment
Distributable Earnings by Portfolio (amounts in thousands)
For the Three Months Ended
September 30,
2022 June 30, 2022 ChangeMaster Lease Portfolio$ 4,300 $ 4,317 $ (17) Medical Office Portfolio 5,155 5,532 (377) Woodstar Fund, net of non-controlling interests 12,117 12,300 (183) Other/Corporate (678) (682) 4 Distributable Earnings$ 20,894 $ 21,467 $ (573) The Property Segment's Distributable Earnings decreased by$0.6 million , from$21.5 million during the second quarter of 2022 to$20.9 million in the third quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$23.3 million , costs and expenses were$16.0 million , other income was$16.3 million and the deduction of income attributable to non-controlling interests in theWoodstar Fund was$2.7 million . 84
--------------------------------------------------------------------------------
Tab le of Co ntents
Revenues increased by
Costs and expenses increased by
Other income increased by$1.8 million in the third quarter of 2022 primarily due to a$2.1 million favorable change in realized gain (loss) on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio.
Income attributable to non-controlling interests in the
Investing and Servicing Segment
The Investing and Servicing Segment's Distributable Earnings decreased by$0.2 million , from$33.6 million during the second quarter of 2022 to$33.4 million in the third quarter of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$53.0 million , costs and expenses were$28.9 million , other income was$14.1 million , there was no income tax provision and the deduction of income attributable to non-controlling interests was$4.8 million . Revenues decreased by$3.6 million in the third quarter of 2022, primarily due to a$7.2 million decrease in servicing and other fees, partially offset by a$3.3 million net increase in interest income reflecting higher recoveries on CMBS investments but reduced interest on lower average balances of 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.
Costs and expenses decreased by
Other income includes profit realized upon securitization of loans by our conduit business, gains on sales of CMBS and operating properties, gains and losses on derivatives that were either effectively terminated or novated, and earnings from unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic servicing rights intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair value due to the attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk and credit risk on our conduit loans and CMBS investments. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair value, with all changes in fair value (realized or unrealized) recognized in earnings. The adjustments to Distributable Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Other income increased by$0.4 million in the third quarter of 2022.
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
Income attributable to non-controlling interests increased
Corporate
Corporate loss increased by$5.7 million , from$59.3 million during the second quarter of 2022 to$65.0 million in the third quarter of 2022, primarily due to (i) a$3.0 million increase in interest expense attributable to higher index rates on our term loan and (ii) a$3.6 million decrease in realized gains on fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes. 85
--------------------------------------------------------------------------------
Tab le of Co ntents
The following table presents our summarized results of operations and
reconciliation to Distributable Earnings for the nine months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 791,554
(367,361) (67,570) (66,016) (105,182) (237,021) (843,150)
Other income (loss) (86,935) 2,820 691,936 34,295 (82,019) 560,097
Income (loss) before income taxes 337,258 38,758 693,951 89,880 (319,037) 840,810
Income tax benefit (provision) 57,682 7 - (8,690) - 48,999
Income attributable to non-controlling interests (10) - (148,379) (9,972) - (158,361)
Net income (loss) attributable to Starwood
Property Trust, Inc. 394,930 38,765 545,572 71,218 (319,037) 731,448
Add / (Deduct): Non-controlling interests attributable to Woodstar II Class A Units
- - 14,073 - - 14,073
Non-controlling interests attributable to unrealized gains/losses
- - 126,056 (3,373) - 122,683
Non-cash equity compensation expense 6,113 980 209 4,157 18,244 29,703
Management incentive fee - - - - 35,121 35,121
Acquisition and investment pursuit costs (359) - (242) (169) - (770)
Depreciation and amortization 3,191 281 24,774 8,888 - 37,134
Interest income adjustment for securities 6,343 - - 4,761 - 11,104
Extinguishment of debt, net - - - - (739) (739)
Consolidated income tax benefit associated with
fair value adjustments (53,099) (2) - 4,346 - (48,755)
Other non-cash items 88,191 - 1,136 278 - 89,605
Reversal of GAAP unrealized and realized (gains) / losses on: (1) Loans
327,743 - - (1,006) - 326,737
Credit loss provision, net 13,027 7,096 - - - 20,123
Securities 5,019 - - 38,853 - 43,872
Woodstar Fund investments - - (658,733) - - (658,733)
Derivatives (465,831) (1,228) (33,162) (43,719) 82,019 (461,921)
Foreign currency 212,672 570 (41) - - 213,201
Loss (earnings) from unconsolidated entities 2,598 (2,631) - (2,501) - (2,534)
Sales of properties (86,610) - - (25,599) - (112,209)
Recognition of Distributable realized gains / (losses) on:
Loans (2) (73,021) - - 270 - (72,751)
Securities (4) (3,102) - - (9,728) - (12,830)
Woodstar Fund investments (5) - - 45,689 - - 45,689
Derivatives (6) 82,165 (59) (1,102) 33,772 5,006 119,782
Foreign currency (7) (4,874) 24 41 - - (4,809)
(Loss) earnings from unconsolidated entities (8) (2,182) 2,632 - 3,758 - 4,208
Sales of properties (9) 84,738 - - 12,601 - 97,339
Distributable Earnings (Loss) $ 537,652 $ 46,428 $ 64,270 $ 96,807 $ (179,386) $ 565,771
Distributable Earnings (Loss) per Weighted Average Diluted
Share $ 1.69 $ 0.15 $ 0.20 $ 0.30 $ (0.56) $ 1.78
86--------------------------------------------------------------------------------
Tab le of Co ntents
The following table presents our summarized results of operations and
reconciliation to Distributable Earnings for the nine months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 572,066 $ 63,432 $ 197,325 $ 154,492 $ - $ 987,315
Costs and expenses (166,414) (39,341) (183,643) (106,414) (194,726) (690,538)
Other income (loss) 42,743 (535) 3,877 59,733 (6,362) 99,456
Income (loss) before income taxes 448,395 23,556 17,559 107,811 (201,088) 396,233
Income tax benefit (provision) 886 338 - (7,602) - (6,378)
Income attributable to non-controlling interests (10) - (14,682) (18,873) - (33,565)
Net income (loss) attributable to
449,271 23,894 2,877 81,336 (201,088) 356,290
Add / (Deduct): Non-controlling interests attributable to Woodstar II Class A Units
- - 14,682 - - 14,682
Non-controlling interests attributable to unrealized gains/losses
- - - 5,061 - 5,061
Non-cash equity compensation expense 5,427 1,163 142 3,179 19,448 29,359
Management incentive fee - - - - 19,107 19,107
Acquisition and investment pursuit costs (458) - (266) (58) - (782)
Depreciation and amortization 750 272 54,080 11,299 - 66,401
Interest income adjustment for securities (2,332) - - 11,405 - 9,073
Extinguishment of debt, net - - - - (739) (739)
Consolidated income tax benefit associated with
fair value adjustments (6,495) - - 405 - (6,090)
Other non-cash items 12 - (881) 585 413 129Reversal of GAAP unrealized and realized (gains) / losses on: (1) Loans
(24,079) - - (44,037) - (68,116)
Credit loss (reversal) provision, net (12,957) 594 - - - (12,363)
Securities 20,134 - - 2,545 - 22,679
Derivatives (59,212) (883) (4,034) (7,544) 5,881 (65,792)
Foreign currency 35,699 279 16 63 - 36,057
Earnings from unconsolidated entities (5,415) (75) - (235) - (5,725)
Sales of properties (17,693) - - (9,723) - (27,416)
Recognition of Distributable realized gains / (losses) on:
Loans (2) 44,625 - - 44,436 - 89,061
Realized credit loss (3) (7,757) - - - - (7,757)
Securities (4) (32,042) - - (2,422) - (34,464)
Derivatives (6) 695 (185) (5,412) 3,152 7,370 5,620
Foreign currency (7) 10,131 (54) (16) (63) - 9,998
Earnings from unconsolidated entities (8) 9,468 75 - 2,001 - 11,544
Sales of properties (9) 8,298 - - 4,975 - 13,273
Distributable Earnings (Loss) $ 416,070 $ 25,080 $ 61,188 $ 106,360 $ (149,608) $ 459,090
Distributable Earnings (Loss) per Weighted Average Diluted
Share $ 1.39 $ 0.08 $ 0.20 $ 0.36 $ (0.50) $ 1.53 ______________________________________________________________________________________________________________________
(1)The reconciling items in this section are exactly equivalent to the amounts
recognized within GAAP net income (before the consolidation of VIEs), each of
which can be agreed back to the respective lines within Note 23 to our Condensed
Consolidated Financial Statements. They reflect both unrealized and realized
(gains) and losses. For added transparency and consistency of presentation, the
entire amount recognized in GAAP income is reversed in this section, and the
realized components of these amounts are reflected in the next section entitled
"Recognition of Distributable realized gains / (losses)."
87
--------------------------------------------------------------------------------
Tab le of Co ntents
(2)Represents the realized portion of GAAP gains (losses) on residential and commercial conduit loans carried under the fair value option that were sold during the period. The amount is calculated as the difference between (i) the net proceeds received in connection with a securitization or sale of loans and (ii) such loans' historical cost basis. (3)Represents loan losses that are deemed nonrecoverable, which is generally upon a realization event, such as when a loan is repaid, or in the case of foreclosure, when the underlying asset is sold. Non-recoverability may also be determined if, in our determination, it is nearly certain that amounts due will not be collected. The amount is calculated as the difference between the cash received and the book value of the asset. (4)Represents the realized portion of GAAP gains (losses) on CMBS and RMBS carried under the fair value option that are sold or impaired during the period. Upon sale, the difference between the cash proceeds received and the historical cost basis of the security is treated as a realized gain or loss for Distributable Earnings purposes. We consider a CMBS or an RMBS credit loss to be realized when such amounts are deemed nonrecoverable. Non-recoverability is generally at the time the underlying assets within the securitization are liquidated, but non-recoverability may also be determined if, in our determination, it is nearly certain that all amounts due will not be collected. The amount is calculated as the difference between the cash received and the historical cost basis of the security. (5)Represents GAAP income from theWoodstar Fund investments excluding unrealized changes in the fair value of its underlying assets and liabilities. The amount is calculated as the difference between theWoodstar Fund's GAAP net income and its unrealized gains (losses), which represents changes in working capital and actual cash distributions received. (6)Represents the realized portion of GAAP gains or losses on the termination or settlement of derivatives that are accounted for at fair value. Derivatives are only treated as realized for Distributable Earnings when they are terminated or settled, and cash is exchanged. The amount of cash received or paid to terminate or settle the derivative is the amount treated as realized for Distributable Earnings purposes at the time of such termination or settlement. (7)Represents the realized portion of foreign currency gains (losses) related to assets and liabilities denominated in a foreign currency. Realization occurs when the foreign currency is converted back to USD. The amount is calculated as the difference between the foreign exchange rate at the time the asset was placed on the balance sheet and the foreign exchange rate at the time cash is received and is offset by any gains or losses on the related foreign currency derivative at settlement. (8)Represents GAAP earnings (loss) from unconsolidated entities excluding non-cash items and unrealized changes in fair value recorded on the books and records of the unconsolidated entities. The difference between GAAP and Distributable Earnings for these entities principally relates to depreciation and unrealized changes in the fair value of mortgage loans and securities. (9)Represents the realized gain (loss) on sales of properties held at depreciated cost. Because depreciation is a non-cash expense that is excluded from Distributable Earnings, GAAP gains upon sale of a property are higher, and GAAP losses are lower, than the respective realized amounts reflected in Distributable Earnings. The amount is calculated as net sales proceeds less undepreciated cost, adjusted for any noncontrolling interest.
Nine Months Ended
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment's Distributable Earnings increased by$121.6 million , from$416.1 million during the nine months of 2021 to$537.7 million in the nine months of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$798.2 million , costs and expenses were$345.7 million , other income was$80.6 million and income tax benefit was$4.6 million . Revenues, consisting principally of interest income on loans, increased by$228.4 million in the nine months of 2022, primarily due to increases in interest income from loans of$198.4 million and investment securities of$29.0 million . The increase in interest income from loans reflects (i) a$155.8 million increase from commercial loans, reflecting higher average balances and index rates, partially offset by the timing effect of certain loans being placed on nonaccrual, and (ii) a$42.6 million increase from residential loans principally due to higher average balances reflecting the timing of purchases and securitizations, partially offset by lower average coupon rates. The increase in interest income from investment securities was primarily due to higher commercial and RMBS average investment balances and the effect of higher index rates on certain commercial investments. Costs and expenses increased by$164.2 million in the nine months of 2022, primarily due to a$157.2 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment's investment portfolio. The increase in interest expense was primarily due to higher average borrowings outstanding and higher average index rates. 88
--------------------------------------------------------------------------------
Tab le of Co ntents
Other income increased by$47.2 million in the nine months of 2022, primarily due to (i) a$76.4 million increased gain on sale of foreclosed properties and (ii) a$28.9 million decrease in recognized losses on RMBS investments, partially offset by (iii) a$46.0 million unfavorable change in gain (loss) on residential loan sales and securitizations, net of related interest rate derivatives, and (iv) a$15.0 million unfavorable change in Distributable Earnings (Loss) from an unconsolidated residential mortgage originator. Income taxes principally relate to the taxable nature of this segment's residential loan securitization activities which are housed in TRSs. Income taxes decreased$10.2 million to a benefit of$4.6 million in the nine months of 2022 compared to a provision of$5.6 million in the nine months of 2021. This decrease was primarily due to a significant reduction in securitization activity during the nine months of 2022 resulting from elevated market volatility during the period, as compared to a more normalized securitization environment in 2021. This market dislocation resulted in our holding more residential loans and recording net unrealized losses on those loans during the nine months of 2022, which led to a corresponding income tax benefit in the period.
Infrastructure Lending Segment
The Infrastructure Lending Segment's Distributable Earnings increased by
Revenues, consisting principally of interest income on loans, increased by
Costs and expenses increased by
Other income increased by$3.5 million from a loss in the nine months of 2021 to income in the nine months of 2022, primarily due to a$2.6 million increase in earnings from an unconsolidated entity and a$0.8 million lower loss on extinguishment of debt.
Property Segment
Distributable Earnings by Portfolio (amounts in thousands)
For the Nine Months Ended
September 30,
2022 2021 ChangeMaster Lease Portfolio$ 12,959 $ 12,925 $ 34 Medical Office Portfolio 16,342 15,382 960 Woodstar I Portfolio - 18,633 (18,633) Woodstar II Portfolio - 16,518 (16,518) Woodstar Fund, net of non-controlling interests 37,136 - 37,136 Other/Corporate (2,167) (2,270) 103 Distributable Earnings$ 64,270 $ 61,188 $ 3,082 The Property Segment's Distributable Earnings increased by$3.1 million , from$61.2 million during the nine months of 2021 to$64.3 million in the nine months of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$69.2 million , costs and expenses were$41.4 million , other income was$44.7 million and the deduction of income attributable to non-controlling interests in theWoodstar Fund was$8.2 million . Revenues decreased by$127.3 million in the nine months of 2022, primarily due to the conversion of the Woodstar Portfolios to theWoodstar Fund onNovember 5, 2021 .
Costs and expenses decreased by
89
--------------------------------------------------------------------------------
Tab le of Co ntents
Other income increased by$50.2 million from a loss in the nine months of 2021 to income in the nine months of 2022 primarily due to$45.7 million of Distributable Earnings (before non-controlling interests of$8.2 million ) from theWoodstar Fund investments in the nine months of 2022.
Investing and Servicing Segment
The Investing and Servicing Segment's Distributable Earnings decreased by$9.6 million from$106.4 million during the nine months of 2021 to$96.8 million in the nine months of 2022. After making adjustments for the calculation of Distributable Earnings, revenues were$166.0 million , costs and expenses were$92.5 million , other income was$41.0 million , income tax provision was$4.3 million and the deduction of income attributable to non-controlling interests was$13.4 million .
Revenues decreased by
Costs and expenses increased by
Other income decreased by
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$2.9 million due to lower taxable income of those TRSs during the nine months of 2022.
Income attributable to non-controlling interests decreased
Corporate
Corporate loss increased by$29.8 million , from$149.6 million during the nine months of 2021 to$179.4 million in the nine months of 2022, primarily due to (i) a$19.6 million increase in interest expense on higher average outstanding term loan and unsecured senior note balances, (ii) a$7.3 million increase in base management fees and (iii) a$2.4 million decrease in realized gains on fixed-to-floating interest rate swaps which hedge a portion of our unsecured senior notes.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet our cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make new investments where appropriate, pay dividends to our stockholders, and other general business needs. We closely monitor our liquidity position and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our strategy for managing liquidity and capital resources has not changed sinceDecember 31, 2021 . Refer to our Form 10-K for a description of these strategies. 90
--------------------------------------------------------------------------------
Tab le of Co ntents
© Edgar Online, source
