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, 2019 (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. See also "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q for a detailed 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. 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 in boththe United States ("U.S.") andEurope . 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 both the
distressed or non-performing loans). Our residential mortgage loans are secured
by a first mortgage lien on residential property and consist of non-agency
residential mortgage loans that are not guaranteed by any
agency or federally chartered corporation.
Infrastructure lending (the "Infrastructure Lending Segment")-engages primarily
? in originating, acquiring, financing and managing infrastructure debt
investments.
Real estate property (the "Property Segment")-engages primarily in acquiring
? and managing equity interests in stabilized commercial real estate properties,
including multifamily properties and commercial properties subject to net
leases, that are held for investment. Real estate investing and servicing (the "Investing and Servicing
Segment")-includes (i) a servicing business in the
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.
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COVID-19 Pandemic
During the first quarter of 2020, there was a global outbreak of a novel
coronavirus, or COVID-19, which has spread to over 200 countries and
territories, including the United States , has spread to every state in the
United States , and is continuing to spread. On March 11, 2020 , the World Health
Organization declared COVID-19 a pandemic, and since then, numerous countries,
including the U.S. , have declared national emergencies with respect to COVID-19
and have instituted "stay-at-home" guidelines or orders to help prevent its
spread. Such actions are creating disruptions in global supply chains,
increasing rates of unemployment and adversely impacting many industries. The
outbreak could have a continued adverse impact on economic and market conditions
and trigger a period of global economic slowdown.
The outbreak of COVID-19 and its impact on the current 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 II, Item 1A of this Quarterly Report on Form 10-Q.
Asset Performance and Collections
We maintain an in-house team of asset management professionalswho 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 to 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. During the three months endedJune 30, 2020 , we closed nine payment related loan modifications, representing an aggregate principal balance of$887.0 million and$4.4 million of interest deferrals in the quarter. Subsequent to quarter end, we closed an additional two payment related loan modifications, representing an aggregate principal balance of$180.5 million . These loan modifications principally included 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' initial 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.
Within residential lending, we continue to monitor the impact of forbearance arrangements granted by our master servicer. For loans which have been securitized, the servicer has advanced 100% of all unpaid principal and interest.
In our property segment, we collected 97% of rents due in the three months endedJune 30, 2020 and granted no lease modifications. 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 and decreased turnover. 66 Table of Contents In our infrastructure segment, we collected 100% of interest due in the three months endedJune 30, 2020 . Our borrowers did not request, nor did we grant, any payment related loan modifications during the three months endedJune 30, 2020 .
Developments During the Second Quarter of 2020
Commercial and Residential Lending Segment
Received gross proceeds of
?
mortgage loans and whole loan interests, respectively.
? Originated or acquired
including the following:
o residential building located in
million.
o mortgage loan for the acquisition of 31 industrial and logistics properties
located in the
fully funded.
? Funded
equity commitments.
Received gross proceeds of
? repayments) from maturities and principal repayments on our commercial loans
and single-borrower CMBS.
? Acquired
? Received proceeds of
from the securitization of$583.5 million of residential mortgage loans.
Infrastructure Lending Segment
? Received proceeds of
our infrastructure loans and bonds.
? Funded
Property Segment
Refinanced our Woodstar I Portfolio by entering into mortgage loans with total
borrowings of
? average annual interest rates of LIBOR + 2.71%. A portion of the net proceeds
from the mortgage loans was used to repay$117.0 million of outstanding government sponsored mortgage loans.
Investing and Servicing Segment
Sold a portion of our equity interest in a servicing and advisory business for
? also resulted in an increase to our remaining investment to reflect its implied
fair value based on the sales price, resulting in an additional gain of
million.
? Obtained four new special servicing assignments for CMBS trusts with a total
unpaid principal balance of
? Sold commercial real estate for gross proceeds of
a net gain of$7.4 million . 67 Table of Contents
Developments During the First Quarter of 2020
Commercial and Residential Lending Segment
? Originated or acquired
including the following:
o
portfolio located across the
o provide acquisition financing for the fee interest in an 878,843 square-foot,
six building office park located in
$193.2 million .
o constructed self-storage facilities located across the
Company funded
? Funded
Received gross proceeds of
? repayments) from maturities and principal repayments on our commercial loans,
single-borrower CMBS and preferred equity interests.
? Acquired
? Received proceeds of
from the securitization of$381.3 million of residential mortgage loans.
Infrastructure Lending Segment
Received proceeds of
? million from maturities and principal repayments on our infrastructure loans
and bonds.
? Acquired
pre-existing infrastructure loan commitments.
Investing and Servicing Segment
Originated commercial conduit loans of
? proceeds of
conduit loans.
? Obtained five new special servicing assignments for CMBS trusts with a total
unpaid principal balance of$4.2 billion .
Acquired CMBS for a purchase price of
? gross proceeds of
non-controlling interests. Corporate Financing
? Repurchased 1,925,421 shares of common stock with a weighted average repurchase
price of$14.95 per share for a total cost of$28.8 million . Subsequent Events
Refer to Note 23 to the Condensed Consolidated Financial Statements for
disclosure regarding significant transactions that occurred subsequent to
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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".
The following table compares our summarized results of operations for the three
and six months ended June 30, 2020 and 2019 by business segment (amounts in
thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2020 2019 $ Change 2020 2019 $ Change
Revenues:
Commercial and Residential
Lending Segment $ 168,367 $ 187,780 $ (19,413) $ 379,804 $ 362,610 $ 17,194
Infrastructure Lending
Segment 19,909 26,166 (6,257) 43,166 54,652 (11,486)
Property Segment 63,624 72,414 (8,790) 127,707 143,013 (15,306)
Investing and Servicing
Segment 44,090 65,633 (21,543) 88,585 132,583 (43,998)
Corporate - 6 (6) - 26 (26)
Securitization VIE
eliminations (30,384) (40,818) 10,434 (61,096) (71,223) 10,127
265,606 311,181 (45,575) 578,166 621,661 (43,495)
Costs and expenses:
Commercial and Residential
Lending Segment 64,191 69,029 (4,838) 168,971 138,217 30,754
Infrastructure Lending
Segment 14,112 21,524 (7,412) 40,191 45,370 (5,179)
Property Segment 61,105 68,212 (7,107) 121,767 135,687 (13,920)
Investing and Servicing
Segment 28,992 40,784 (11,792) 65,920 79,458 (13,538)
Corporate 53,747 53,947 (200) 126,960 108,076 18,884
Securitization VIE
eliminations 85 (27) 112 38 (50) 88
222,232 253,469 (31,237) 523,847 506,758 17,089
Other income (loss):
Commercial and Residential
Lending Segment 33,358 8,811 24,547 (33,183) 7,777 (40,960)
Infrastructure Lending
Segment (1,245) (3,456) 2,211 (2,593) (6,065) 3,472
Property Segment (6,656) (10,111) 3,455 (36,848) (52,617) 15,769
Investing and Servicing
Segment 47,822 26,986 20,836 1,904 52,592 (50,688)
Corporate 4,517 15,309 (10,792) 33,752 24,869 8,883
Securitization VIE
eliminations 30,493 40,728 (10,235) 61,314 71,362 (10,048)
108,289 78,267 30,022 24,346 97,918 (73,572)
Income (loss) before
income taxes:
Commercial and Residential
Lending Segment 137,534 127,562 9,972 177,650 232,170 (54,520)
Infrastructure Lending
Segment 4,552 1,186 3,366 382 3,217 (2,835)
Property Segment (4,137) (5,909) 1,772 (30,908) (45,291) 14,383
Investing and Servicing
Segment 62,920 51,835 11,085 24,569 105,717 (81,148)
Corporate (49,230) (38,632) (10,598) (93,208) (83,181) (10,027)
Securitization VIE
eliminations 24 (63) 87 180 189 (9)
151,663 135,979 15,684 78,665 212,821 (134,156)
Income tax benefit
(provision) 1,298 (3,533) 4,831 8,027 (3,867) 11,894
Net income attributable to
non-controlling interests (13,305) (5,430) (7,875)
(13,805) (11,555) (2,250)
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Net income attributable to
Starwood Property
Trust, Inc. $ 139,656 $ 127,016 $ 12,640 $ 72,887 $ 197,399 $ (124,512) Three Months Ended
Commercial and Residential Lending Segment
Revenues For the three months endedJune 30, 2020 , revenues of our Commercial and Residential Lending Segment decreased$19.4 million to$168.4 million , compared to$187.8 million for the three months endedJune 30, 2019 . This decrease was primarily due to decreases in interest income from loans of$12.9 million and investment securities of$7.0 million . The decrease in interest income from loans was principally due to (i) lower prepayment related income and (ii) lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans), both partially offset by (iii) higher average balances of both commercial and residential loans. The decrease in interest income from investment securities was primarily due to lower prepayment related income
and lower average LIBOR rates. Costs and Expenses For the three months endedJune 30, 2020 , costs and expenses of our Commercial and Residential Lending Segment decreased$4.8 million to$64.2 million , compared to$69.0 million for the three months endedJune 30, 2019 . This decrease was primarily due to a$16.7 million decrease 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$9.2 million increase in credit loss provision and a$1.9 million increase in general and administrative expenses. The decrease in interest expense was primarily due to lower average LIBOR rates partially offset by higher average borrowings outstanding. The increase in the credit loss provision was due to the recognition of current expected credit losses ("CECL") during the quarter endedJune 30, 2020 in accordance with the new credit loss accounting standard effectiveJanuary 1, 2020 (see Notes 2 and 4 to the Condensed Consolidated Financial Statements). The CECL provision in the 2020 second quarter increased as a result of continued poor macroeconomic conditions due to the economic disruption caused by the COVID-19 pandemic and adjusted expected repayment timing on our commercial loans.
Net Interest Income (amounts in thousands)
For the Three Months Ended
June 30,
2020 2019 Change
Interest income from loans $ 150,136 $ 163,071 $ (12,935) Interest income from investment securities 17,345
24,367 (7,022)
Interest expense (41,871) (58,564) 16,693
Net interest income $ 125,610 $ 128,874 $ (3,264) For the three months ended
During the three months ended
For the Three Months Ended
June 30,
2020 2019
Commercial 6.1 % 7.5 %
Residential 6.5 % 6.7 %
Overall 6.1 % 7.4 %
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The overall weighted average unlevered yield was lower due to the lower levels of prepayment related income and decreases in LIBOR.
During the three months ended
Other Income For the three months endedJune 30, 2020 , other income of our Commercial and Residential Lending Segment increased$24.5 million to$33.3 million compared to$8.8 million for the three months endedJune 30, 2019 . This increase was primarily due to (i) a$27.6 million favorable change in fair value of residential mortgage loans, (ii) a$13.9 million favorable change in foreign currency gain (loss) and (iii) a$6.4 million favorable change in fair value of investment securities, all partially offset by (iv) a$17.3 million unfavorable change in gain (loss) on derivatives and (v) a$4.8 million decrease in earnings from unconsolidated entities. Favorable changes in fair value of residential mortgage loans and investment securities reflect partial recoveries of unfavorable changes in the first quarter of 2020 that were attributable to widening credit spreads resulting from market disruption and dislocation caused by the impacts of COVID-19. Those credit spreads began to tighten in the second quarter of 2020. The unfavorable change in gain (loss) on derivatives reflects a$20.5 million unfavorable change in foreign currency hedges, partially offset by a$3.2 million favorable change in interest rate swaps. 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 unfavorable change in the foreign currency hedges and the favorable change in foreign currency gain (loss) reflect the overall weakening of theU.S. dollar against the Australian Dollar ("AUD") and EUR in the second quarter of 2020 compared to a strengthening of theU.S. dollar against the GBP in the second quarter of 2019. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments.
Infrastructure Lending Segment
Revenues For the three months endedJune 30, 2020 , revenues of our Infrastructure Lending Segment decreased$6.3 million to$19.9 million , compared to$26.2 million for the three months endedJune 30, 2019 . This decrease was primarily due to decreases in interest income from loans of$6.2 million and investment securities of$0.2 million . The decrease in interest income from loans was primarily due to lower average LIBOR rates. Costs and Expenses For the three months endedJune 30, 2020 , costs and expenses of our Infrastructure Lending Segment decreased$7.4 million to$14.1 million , compared to$21.5 million for the three months endedJune 30, 2019 . The decrease was primarily due to a$6.6 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment's investment portfolio and a$1.5 million decrease in credit loss provision. The decrease in interest expense was primarily due to lower average LIBOR rates. The decrease in the credit loss provision was primarily due to the reversal of a portion of the CECL allowance during the quarter endedJune 30, 2020 reflecting adjusted expected repayment timing on our infrastructure loans as well as some loan paydowns.
Net Interest Income (amounts in thousands)
For the Three Months Ended
June 30,
2020 2019 Change
Interest income from loans $ 19,126 $ 25,291 $ (6,165) Interest income from investment securities 683
868 (185)
Interest expense (9,678) (16,258) 6,580
Net interest income $ 10,131 $ 9,901 $ 230
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For the three months ended June 30, 2020 , net interest income of our
Infrastructure Lending Segment increased $0.2 million to $10.1 million , compared
to $9.9 million for the three months ended June 30, 2019 . 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.
During the three months ended June 30, 2020 and 2019, the weighted average
unlevered yields on the Infrastructure Lending Segment's investments were as
follows:
For the Three Months Ended
June 30,
2020 2019Loans and investment securities held-for-investment 5.1
% 6.3 % Loans held-for-sale 3.2 % 4.7 % During the three months endedJune 30, 2020 and 2019, the Infrastructure Lending Segment's weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 3.3% and 4.8%, respectively. Other Loss For the three months endedJune 30, 2020 and 2019, other loss of our Infrastructure Lending Segment decreased$2.2 million to$1.2 million , compared to$3.4 million for the three months endedJune 30, 2019 . The decrease in other loss primarily reflects the non-recurrence of a$2.8 million loss on extinguishment of debt in the second quarter of 2019 resulting from the write-off of deferred financing fees relating to partial debt prepayments from proceeds of loan repayments and sales. Property Segment
Change in Results by Portfolio (amounts in thousands)
$ Change from prior period
Costs and Gain (loss) on derivative Income (loss) before
Revenues expenses financial instruments Other income (loss) income taxes
Master Lease Portfolio $ 3 $ 74 $ - $ - $ (71)
Medical Office Portfolio (1,312) (1,792) 5,834 - 6,314
Woodstar I Portfolio 751 2,413 (57) (1,702) (3,421)
Woodstar II Portfolio 628 (39) - - 667
Ireland Portfolio (8,874) (7,510) 756 9 (599)Investment in unconsolidated entities - -
- (1,044) (1,044)
Other/Corporate 14 (253) - (341) (74)
Total $ (8,790) $ (7,107) $ 6,533 $ (3,078) $ 1,772
See Note 6 to the Condensed Consolidated Financial Statements for a description
of the above-referenced Property Segment portfolios. The Ireland Portfolio,
which was comprised of 11 office properties and one multifamily property all
located in Dublin, Ireland , was sold in December 2019 .
Revenues
For the three months endedJune 30, 2020 , revenues of our Property Segment decreased$8.8 million to$63.6 million , compared to$72.4 million for the three months endedJune 30, 2019 . The decrease in revenues was primarily due to the sale of the Ireland Portfolio inDecember 2019 . Costs and Expenses For the three months endedJune 30, 2020 , costs and expenses of our Property Segment decreased$7.1 million to$61.1 million , compared to$68.2 million for the three months endedJune 30, 2019 . The decrease in costs and expenses primarily reflects the sale of the Ireland Portfolio inDecember 2019 . 72 Table of Contents Other Loss For the three months endedJune 30, 2020 , other loss of our Property Segment decreased$3.4 million to$6.7 million , compared to$10.1 million for the three months endedJune 30, 2019 . The decrease in other loss was primarily due to (i) a$6.5 million decreased loss on derivatives,$5.8 million of which was attributable to interest rate swaps which primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio, partially offset by (ii) a$2.2 million loss on extinguishment of debt in the second quarter of 2020 in connection with the refinancing of our Woodstar I Portfolio and (iii)$1.0 million of earnings in the second quarter of 2019 that did not recur in the 2020 second quarter from our equity investee that owns four regional shopping malls (the "Retail Fund "), which is an investment company that measures its assets at fair value. Our investment in theRetail Fund was written off as ofDecember 31, 2019 due to continued declines in the estimated fair values of its properties.
Investing and Servicing Segment
Revenues For the three months endedJune 30, 2020 , revenues of our Investing and Servicing Segment decreased$21.5 million to$44.1 million , compared to$65.6 million for the three months endedJune 30, 2019 . The decrease in revenues in the second quarter of 2020 was primarily due to decreases of$7.5 million in interest income from conduit loans and CMBS,$7.3 million in servicing fees and$6.5 million in rental income from our REIS Equity Portfolio (see Note 6 to the Condensed Consolidated Financial Statements) due to fewer properties held and an owned hotel which was closed during the quarter due to COVID-19. The decrease in interest income primarily reflects a$6.8 million decrease in interest recoveries on CMBS. Costs and Expenses For the three months endedJune 30, 2020 , costs and expenses of our Investing and Servicing Segment decreased$11.8 million to$29.0 million , compared to$40.8 million for the three months endedJune 30, 2019 . The decrease in costs and expenses was primarily due to decreases of$5.2 million in general and administrative expenses reflecting lower incentive compensation,$4.3 million in costs of rental operations, depreciation and amortization due to fewer properties held and$2.3 million in interest expense on borrowings related to properties held and conduit loans. Other Income
For the three months endedJune 30, 2020 , other income of our Investing and Servicing Segment increased$20.8 million to$47.8 million , compared to$27.0 million for the three months endedJune 30, 2019 . The increase in other income was primarily due to (i) realized and unrealized gains totaling$27.9 million resulting from the sale inApril 2020 of a portion of our unconsolidated equity interest in a servicing and advisory business, as further described in Note 7 to the Condensed Consolidated Financial Statements, (ii) a$7.4 million gain on sale of an operating property in the second quarter of 2020, (iii) a$6.5 million favorable change in fair value of servicing rights and (iv) a$3.1 million decreased loss on derivatives which primarily hedge our interest rate risk on conduit loans, all partially offset by (v) a$15.1 million lesser increase in fair value of conduit loans and (vi) a$7.9 million lesser increase in fair value of CMBS investments. Corporate and Other Items Corporate Costs and Expenses
For the three months ended
Corporate Other Income For the three months endedJune 30, 2020 , corporate other income decreased$10.8 million to$4.5 million , compared to$15.3 million for the three months endedJune 30, 2019 . The decrease in corporate other income was 73
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primarily due to decreased gains on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing.
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 conduit businesses and certain other real estate related
investing activities which are housed in taxable REIT subsidiaries ("TRSs"). For
the three months ended June 30, 2020 , our income taxes decreased from a
provision of $3.5 million to a benefit of $1.3 million due to tax losses of our
TRSs in the second quarter of 2020.
Net Income Attributable to Non-controlling Interests
During the three months endedJune 30, 2020 , net income attributable to non-controlling interests increased$7.9 million to$13.3 million , compared to$5.4 million during the three months endedJune 30, 2019 . The increase was primarily due to non-controlling interests in earnings of a consolidated CMBS joint venture in which we hold a 51% interest.
Six Months Ended
Commercial and Residential Lending Segment
Revenues For the six months endedJune 30, 2020 , revenues of our Commercial and Residential Lending Segment increased$17.2 million to$379.8 million , compared to$362.6 million for the six months endedJune 30, 2019 . This increase was primarily due to an increase in interest income from loans of$24.9 million , partially offset by a decrease in interest income from investment securities of$8.3 million . The increase in interest income from loans was principally due to (i) higher prepayment related income and (ii) higher average balances of both commercial and residential loans, partially offset by (iii) lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans). The decrease in interest income from investment securities was primarily due to lower prepayment related income and lower average LIBOR rates. Costs and Expenses For the six months endedJune 30, 2020 , costs and expenses of our Commercial and Residential Lending Segment increased$30.8 million to$169.0 million , compared to$138.2 million for the six months endedJune 30, 2019 . This increase was primarily due to a$49.4 million increase in credit loss provision and a$3.2 million increase in general and administrative expenses, partially offset by a$24.3 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment's investment portfolio. The increase in the credit loss provision was due to the recognition of current expected credit losses ("CECL") during the six months endedJune 30, 2020 in accordance with the new credit loss accounting standard effectiveJanuary 1, 2020 (see Notes 2 and 4 to the Condensed Consolidated Financial Statements). The CECL provision in the first half of 2020 was magnified by
the
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significant deterioration in macroeconomic forecasts between theJanuary 1 CECL effective date and theJune 30 period end due to the economic disruption caused by the COVID-19 pandemic. The decrease in interest expense was primarily due to lower average LIBOR rates partially offset by higher average borrowings outstanding.
Net Interest Income (amounts in thousands)
For the Six Months Ended
June 30,
2020 2019 Change
Interest income from loans $ 342,517 $ 317,666 $ 24,851 Interest income from investment securities 35,973 44,275
(8,302)
Interest expense (95,821) (120,168) 24,347
Net interest income $ 282,669 $ 241,773 $ 40,896
For the six months ended June 30, 2020 , net interest income of our Commercial
and Residential Lending Segment increased $40.9 million to $282.7 million ,
compared to $241.8 million for the six months ended June 30, 2019 . This increase
reflects the net increase in interest income and the decrease in interest
expense, both as discussed in the sections above.
During the six months ended
For the Six Months Ended
June 30,
2020 2019
Commercial 6.6 % 7.6 %
Residential 6.6 % 6.8 %
Overall 6.6 % 7.5 %
The overall weighted average unlevered yield was lower as higher levels of prepayment related income were more than offset by decreases in LIBOR.
During the six months ended
Other Income (Loss) For the six months endedJune 30, 2020 , other income (loss) of our Commercial and Residential Lending Segment decreased$41.0 million to a loss of$33.2 million compared to income of$7.8 million for the six months endedJune 30, 2019 . This decrease was primarily due to (i) a$25.4 million increase in foreign currency loss, (ii) a$19.8 million unfavorable change in fair value of investment securities, (iii) a$9.3 million unfavorable change in fair value of residential mortgage loans, (iv) a$5.3 million decrease in earnings from unconsolidated entities and (v) a$4.0 million unfavorable change in gains (losses) on sales of loans and securities, all partially offset by (vi) a$22.8 million favorable change in gain (loss) on derivatives. Changes in fair value are attributable to widening credit spreads resulting from market disruption and dislocation caused by the impacts of COVID-19. The favorable change in gain (loss) on derivatives reflects a$41.2 million increased gain on foreign currency hedges, partially offset by an$18.4 million unfavorable change in interest rate swaps. 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 increased foreign currency loss reflect the overall strengthening of theU.S. dollar against the GBP and EUR in the first half of 2020 versus a lesser strengthening of theU.S. dollar against those currencies in the first half of 2019. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. 75 Table of Contents
Infrastructure Lending Segment
Revenues For the six months endedJune 30, 2020 , revenues of our Infrastructure Lending Segment decreased$11.5 million to$43.2 million , compared to$54.7 million for the six months endedJune 30, 2019 . This decrease was primarily due to decreases in interest income from loans of$10.7 million and investment securities of$0.4 million . The decrease in interest income from loans was primarily due to lower average loan balances outstanding as a result of sales and repayments and a decrease in average LIBOR rates partially offset by an increase in average spreads on our infrastructure loans. Costs and Expenses For the six months endedJune 30, 2020 , costs and expenses of our Infrastructure Lending Segment decreased$5.2 million to$40.2 million , compared to$45.4 million for the six months endedJune 30, 2019 . The decrease was primarily due to a$12.0 million decrease 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$6.2 million increase in credit loss provision. The decrease in interest expense was primarily due to lower average LIBOR rates and lower average borrowings as a result of loan sales and repayments. The increase in the credit loss provision was due to the recognition of CECL during the six months endedJune 30, 2020 in accordance with the new credit loss accounting standard effectiveJanuary 1, 2020 . As discussed above, the CECL provision was magnified by the significant deterioration in macroeconomic forecasts due to the economic disruption caused by the COVID-19 pandemic.
Net Interest Income (amounts in thousands)
For the Six Months Ended
June 30,
2020 2019 Change
Interest income from loans $ 41,539 $ 52,206 $ (10,667) Interest income from investment securities 1,384 1,753
(369)
Interest expense (22,795) (34,835) 12,040
Net interest income $ 20,128 $ 19,124 $ 1,004
For the six months ended June 30, 2020 , net interest income of our
Infrastructure Lending Segment increased $1.0 million to $20.1 million , compared
to $19.1 million for the six months ended June 30, 2019 . The increase reflects
the decrease in interest expense on the secured financing facilities, which was
partially offset by the decrease in interest income, both as discussed in the
sections above.
During the six months ended June 30, 2020 and 2019, the weighted average
unlevered yields on the Infrastructure Lending Segment's investments were as
follows:
For the Six Months Ended
June 30,
2020 2019Loans and investment securities held-for-investment 5.6 %
6.2 % Loans held-for-sale 3.6 % 4.0 % During the six months endedJune 30, 2020 and 2019, the Infrastructure Lending Segment's weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 3.8% and 4.9%, respectively. 76 Table of Contents Other Loss For the six months endedJune 30, 2020 , other loss of our Infrastructure Lending Segment decreased$3.5 million to$2.6 million , compared to$6.1 million for the six months endedJune 30, 2019 . The decrease in other loss primarily reflects a decreased loss on extinguishment of debt resulting from the write-off of deferred financing fees relating to partial debt prepayments from proceeds
of loan repayments and sales. Property Segment
Change in Results by Portfolio (amounts in thousands)
$ Change from prior year
Costs and Gain (loss) on derivative Income (loss) before
Revenues expenses financial instruments Other income (loss) income taxes
Master Lease Portfolio $ 3 $ 76 $ - $ - $ (73)
Medical Office Portfolio (1,283) (4,122) (18,470) - (15,631)
Woodstar I Portfolio 2,071 4,593 (57) (1,702) (4,281)
Woodstar II Portfolio 1,747 537 - - 1,210
Ireland Portfolio (17,858) (15,011) (6,453) - (9,300)Investment in unconsolidated entities - -
- 42,761 42,761
Other/Corporate 14 7 - (310) (303)
Total $ (15,306) $ (13,920) $ (24,980) $ 40,749 $ 14,383
See Note 6 to the Condensed Consolidated Financial Statements for a description
of the above-referenced Property Segment portfolios. The Ireland Portfolio,
which was comprised of 11 office properties and one multifamily property all
located in Dublin, Ireland , was sold in December 2019 .
Revenues
For the six months ended June 30, 2020 , revenues of our Property Segment
decreased $15.3 million to $127.7 million , compared to $143.0 million for the
six months ended June 30, 2019 . The decrease in revenues was primarily due to
the sale of the Ireland Portfolio in December 2019 , partially offset by
increased rental income in the Woodstar Portfolios due to rental rate increases
effective May 2019 .
Costs and Expenses
For the six months ended
Other Loss
For the six months endedJune 30, 2020 , other loss of our Property Segment decreased$15.8 million to$36.8 million , compared to$52.6 million for the six months endedJune 30, 2019 . The decrease in other loss was primarily due to a$42.8 million loss in the 2019 period that did not recur in the 2020 period from our investment in theRetail Fund . Our investment in theRetail Fund was written off as ofDecember 31, 2019 due to continued declines in the estimated fair values of its properties. Partially offsetting the effect of theRetail Fund was a$25.0 million increased loss on derivatives, consisting of (i) an$18.5 million increased loss on interest rate swaps which primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio and (ii) the non-recurrence of a$6.5 million gain in the 2019 first quarter on foreign exchange contracts which hedged our Euro currency exposure with respect to the Ireland Portfolio. 77 Table of Contents
Investing and Servicing Segment
Revenues For the six months endedJune 30, 2020 , revenues of our Investing and Servicing Segment decreased$44.0 million to$88.6 million , compared to$132.6 million for the six months endedJune 30, 2019 . The decrease in revenues was primarily due to decreases of$28.1 million in servicing fees,$9.7 million in rental income from our REIS Equity Portfolio due to fewer properties held and an owned hotel which was closed during the quarter due to COVID-19 and$6.3 million in interest income from conduit loans and CMBS, which reflects a$5.9 million decrease in interest recoveries on CMBS. Costs and Expenses
For the six months endedJune 30, 2020 , costs and expenses of our Investing and Servicing Segment decreased$13.6 million to$65.9 million , compared to$79.5 million for the six months endedJune 30, 2019 . The decrease in costs and expenses was primarily due to decreases of$7.5 million in costs of rental operations, depreciation and amortization due to fewer properties held,$3.4 million in general and administrative expenses reflecting lower incentive compensation and$2.9 million in interest expense on borrowings related to properties held and conduit loans. Other Income For the six months endedJune 30, 2020 , other income of our Investing and Servicing Segment decreased$50.7 million to$1.9 million , compared to$52.6 million for the six months endedJune 30, 2019 . The decrease in other income was primarily due to (i) a$73.2 million unfavorable change in fair value of CMBS investments primarily due to widening credit spreads resulting from market disruption and dislocation caused by the impacts of COVID-19, (ii) a$12.5 million increased loss on derivatives which primarily hedge our interest rate risk on conduit loans and (iii) a$5.6 million lesser increase in fair value of conduit loans, all partially offset by (iv) realized and unrealized gains totaling$27.9 million resulting from the sale inApril 2020 of a portion of our unconsolidated equity interest in a servicing and advisory business, as further described in Note 7 to the Condensed Consolidated Financial Statements, (v) a$7.3 million favorable change in fair value of servicing rights and (vi) a$6.5 million increased gain on sale of operating properties. Corporate and Other Items
Corporate Costs and Expenses
For the six months endedJune 30, 2020 , corporate expenses increased$18.9 million to$127.0 million , compared to$108.1 million for the six months endedJune 30, 2019 . The increase was primarily due to a$17.6 million increase in management fees. Corporate Other Income For the six months endedJune 30, 2020 , corporate other income increased$8.9 million to$33.7 million , compared to$24.8 million for the six months endedJune 30, 2019 . The increase in corporate other income was primarily due to increased gains on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing.
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 conduit businesses and certain other real estate related
investing activities which are housed in taxable REIT subsidiaries
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("TRSs"). For the six months ended June 30, 2020 , our income taxes decreased
from a provision of $3.9 million to a benefit of $8.0 million due to tax losses
of our TRSs in the first half of 2020.
Net Income Attributable to Non-controlling Interests
During the six months endedJune 30, 2020 , net income attributable to non-controlling interests increased$2.2 million to$13.8 million , compared to$11.6 million during the six months endedJune 30, 2019 . The increase was primarily due to non-controlling interests in earnings of a consolidated CMBS joint venture in which we hold a 51% interest. Non-GAAP Financial Measures
Core Earnings is a non-GAAP financial measure. We calculate Core Earnings as GAAP net income (loss) excluding the following:
(i) non-cash equity compensation expense;
(ii) incentive fees due under our management agreement;
(iii) depreciation and amortization of real estate and associated intangibles;
(iv) acquisition costs associated with successful acquisitions;
any unrealized gains, losses or other non-cash items recorded in net income
(v) (loss) for the period, regardless of whether such items are included in other
comprehensive income or loss, or in net income (loss); and
(vi) any deductions for distributions payable with respect to equity securities
of subsidiaries issued in exchange for properties or interests therein.
We believe that Core Earnings provides an additional measure of our core operating performance by eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial results to those of other comparable REITs with fewer or no non-cash adjustments and comparison of our own operating results from period to period. Our management uses Core Earnings in this way, and also uses Core Earnings to compute the incentive fee due under our management agreement. The Company believes that its investors also use Core Earnings or a comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers, and as such, the Company believes that the disclosure of Core Earnings is useful to (and expected by) its investors. However, the Company cautions that Core Earnings does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (loss) (determined in accordance with GAAP), or an indication of our cash flows from operating activities (determined in accordance with GAAP), a measure of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core Earnings may not be comparable to the Core Earnings reported by other REITs.
The weighted average diluted share count applied to Core Earnings for purposes of determining Core Earnings per share ("EPS") is computed using the GAAP diluted share count, adjusted for the following:
Unvested stock awards - Currently, unvested stock awards are excluded from
(i) the denominator of GAAP EPS. The related compensation expense is also
excluded from Core Earnings. In order to
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effectuate dilution from these awards in the Core Earnings computation, we
adjust the GAAP diluted share count to include these shares.
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
(ii) an event that may or may not occur. Consistent with the treatment of other
unrealized adjustments to Core Earnings, we adjust the GAAP diluted share
count to exclude the potential shares issuable upon conversion until a
conversion occurs.
Subsidiary equity - The intent of a February 2018 amendment to ourmanagement agreement (the "Amendment") is to treat subsidiary equity in the
same manner as if parent equity had been issued. The Class A Units issued
(iii) 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 Core EPS calculation (amounts in thousands):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Diluted weighted average shares - GAAP 291,293 289,072 281,440 288,529
Add: Unvested stock awards 2,794 2,092 2,635 2,172
Add: Woodstar II Class A Units 10,648 11,571 10,693 11,740
Less: Convertible Notes dilution (9,649) (9,649) - (9,963)
Diluted weighted average shares - Core 295,086 293,086 294,768 292,478
The definition of Core Earnings allows management to make adjustments, subject
to the approval of a majority of our independent directors, in situations where
such adjustments are considered appropriate in order for Core Earnings to be
calculated in a manner consistent with its definition and objective. No
adjustments to the definition of Core Earnings became effective during thesix months endedJune 30, 2020 . As a reminder, in 2015, we adjusted the calculation of Core Earnings related to the equity component of our Convertible Notes. We previously amortized the equity component of these instruments through interest expense for Core Earnings purposes, consistent with our GAAP treatment. However, for Core Earnings purposes, the amount is not considered realized until the earlier of (a) the entire issuance of the notes has been extinguished; or (b) the equity portion has been fully amortized via repurchases of the notes.
In
The following table summarizes our quarterly Core Earnings per weighted average
diluted share for the six months ended
Core Earnings For the Three-Month Periods Ended
March 31 June 30
2020 $ 0.55 $ 0.43
2019 0.28 $ 0.52
Core Earnings per weighted average diluted share for the six months ended June
30, 2019 does not equal the sum of the individual quarters due to rounding
and
other computational factors.
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Three Months Ended
The following table presents our summarized results of operations and
reconciliation to Core Earnings for the three months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 168,367 $ 19,909 $ 63,624 $ 44,090 $ - $ 295,990
Costs and expenses (64,191) (14,112) (61,105) (28,992) (53,747) (222,147)
Other income (loss) 33,358 (1,245) (6,656) 47,822 4,517 77,796
Income (loss) before
income taxes 137,534 4,552 (4,137) 62,920 (49,230) 151,639
Income tax (provision) benefit (3,257) (56) - 4,611 - 1,298
Income attributable to
non-controlling interests (4) - (5,111) (8,166) - (13,281)
Net income (loss) attributable
to Starwood
Property Trust, Inc. 134,273 4,496 (9,248) 59,365 (49,230) 139,656
Add / (Deduct):
Non-controlling interests
attributable to Woodstar II
Class A Units - - 5,111 - - 5,111
Non-cash equity compensation
expense 1,436 481 58 1,247 4,130 7,352
Acquisition and investment
pursuit costs 206 - (88) (72) - 46
Depreciation and amortization 370 79 19,236 3,337 - 23,022
Credit loss provision, net 11,294 (1,092) - - - 10,202
Interest income adjustment for
securities 1,149 - - 1,627 - 2,776
Extinguishment of debt, net - - - - (247) (247)
Income tax provision (benefit)
associated with fair value
adjustments 1,914 - - (392) - 1,522
Other non-cash items 4 - (485) 230 156 (95)
Reversal of GAAP unrealized
(gains) / losses on:
Loans (33,010) - - (1,440) - (34,450)
Securities (5,454) - - (7,941) - (13,395)
Derivatives 11,043 420 3,401 3,524 (240) 18,148
Foreign currency (6,942) (310) 48 31 - (7,173)
(Earnings) loss from
unconsolidated entities (671) 1,118 - (29,526) - (29,079)
Recognition of Core realized
gains / (losses) on:
Loans (5,663) - - (1) - (5,664)
Securities - - - (181) - (181)
Derivatives 4,522 - (369) (10) - 4,143
Foreign currency (1,969) 52 (50) (31) - (1,998)
(Loss) earnings from
unconsolidated entities (24) (733) - 12,992 - 12,235
Sales of properties - - - (5,789) - (5,789)
Core Earnings (Loss) $ 112,478 $ 4,511 $
17,614
0.02 $ 0.06 $ 0.12 $ (0.15) $ 0.43
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The following table presents our summarized results of operations and
reconciliation to Core Earnings for the three months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 187,780 $ 26,166 $ 72,414 $ 65,633 $ 6 $ 351,999
Costs and expenses (69,029) (21,524) (68,212) (40,784) (53,947) (253,496)
Other income (loss) 8,811 (3,456) (10,111) 26,986 15,309 37,539Income (loss) before income taxes 127,562 1,186 (5,909) 51,835 (38,632) 136,042 Income tax (provision) benefit (1,832) 186 - (1,887) - (3,533) Income attributable to non-controlling interests (21) - (5,355) (117) - (5,493) Net income (loss) attributable to Starwood Property Trust, Inc. 125,709 1,372 (11,264) 49,831 (38,632) 127,016 Add / (Deduct): Non-controlling interests attributable to Woodstar II Class A Units - - 5,355 - - 5,355 Non-cash equity compensation expense 911 563 77 1,702 3,811 7,064 Acquisition and investment pursuit costs (24) - (88) (305) (356) (773) Depreciation and amortization 285 - 23,416 4,822 - 28,523 Credit loss provision, net 2,096 422 - - - 2,518 Interest income adjustment for securities (194) - - 3,381 - 3,187 Extinguishment of debt, net - - - - (246) (246) Other non-cash items - - (452) 371 150 69 Reversal of GAAP unrealized (gains) / losses on: Loans (5,363) - - (16,528) - (21,891) Securities 948 - - (15,815) - (14,867) Derivatives (5,519) 2,833 12,717 6,927 (15,858) 1,100 Foreign currency 6,927 83 8 (1) - 7,017 Earnings from unconsolidated entities (5,492) - (1,044) (2,754) - (9,290) Recognition of Core realized gains / (losses) on: Loans (550) (755) - 20,155 - 18,850 Securities 597 - - (423) - 174 Derivatives 736 (2,228) 1,484 (7,614) - (7,622) Foreign currency (1,205) 64 (8) 1 - (1,148) Earnings from unconsolidated entities 4,682 - - 4,137 - 8,819 Core Earnings (Loss)$ 124,544 $ 2,354$ 30,201 $ 47,887 $ (51,131) $ 153,855 Core Earnings (Loss) per Weighted Average Diluted Share$ 0.42 $ 0.01$ 0.10 $ 0.16$ (0.17) $ 0.52 82 Table of Contents
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment's Core Earnings decreased by$12.0 million , from$124.5 million during the second quarter of 2019 to$112.5 million in the second quarter of 2020. After making adjustments for the calculation of Core Earnings, revenues were$169.5 million , costs and expenses were$50.9 million and other loss was$4.8 million . Core revenues, consisting principally of interest income on loans, decreased by$18.1 million in the second quarter of 2020, primarily due to decreases in interest income from loans of$12.9 million and investment securities of$5.7 million . The decrease in interest income from loans was principally due to (i) lower prepayment related income and (ii) lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans), both partially offset by (iii) higher average balances of both commercial and residential loans. The decrease in interest income from investment securities was primarily due to lower prepayment related income and lower average LIBOR rates. Core costs and expenses decreased by$14.9 million in the second quarter of 2020, primarily due to a$16.7 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. Such decrease was partially offset by higher general and administrative and other expenses.
Core other income (loss) decreased by
Infrastructure Lending Segment
The Infrastructure Lending Segment's Core Earnings increased by$2.1 million , from$2.4 million in the second quarter of 2019 to$4.5 million in the second quarter of 2020. After making adjustments for the calculation of Core Earnings, revenues were$19.9 million , costs and expenses were$14.6 million and other loss was$0.7 million . Core revenues, consisting principally of interest income on loans, decreased by$6.3 million in the second quarter of 2020, primarily due to decreases in interest income from loans of$6.2 million and investment securities of$0.2 million . The decrease in interest income from loans was primarily due to lower average LIBOR rates.
Core costs and expenses decreased by$5.9 million in the second quarter of 2020, primarily due to a decrease in interest expense on the secured debt facilities used to finance this segment's investment portfolio principally due to lower average LIBOR rates.
Core other loss decreased by
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Property Segment
Core Earnings by Portfolio (amounts in thousands)
For the Three Months Ended
June 30,
2020 2019 Change
Master Lease Portfolio $ 4,230 $ 4,300 $ (70)
Medical Office Portfolio 3,782 6,643 (2,861)
Woodstar I Portfolio 4,320 7,746 (3,426)
Woodstar II Portfolio 6,373 5,550 823
Ireland Portfolio - 6,962 (6,962)
Other/Corporate (1,091) (1,000) (91)
Core Earnings $ 17,614 $ 30,201 $ (12,587) The Property Segment's Core Earnings decreased by$12.6 million , from$30.2 million during the second quarter of 2019 to$17.6 million in the second quarter of 2020. After making adjustments for the calculation of Core Earnings, revenues were$63.2 million , costs and expenses were$42.3 million and other loss was$3.3 million .
Core revenues decreased by
Core costs and expenses decreased by
Core other income (loss) decreased by$6.3 million in the second quarter of 2020 primarily due to (i) a$4.3 million unfavorable change in realized gains (losses) on certain interest rate and foreign currency derivatives and (ii) a$2.2 million loss on extinguishment of debt in the second quarter of 2020 in connection with the refinancing of our Woodstar I Portfolio.
Investing and Servicing Segment
The Investing and Servicing Segment's Core Earnings decreased by$10.9 million , from$47.9 million during the second quarter of 2019 to$37.0 million in the second quarter of 2020. After making adjustments for the calculation of Core Earnings, revenues were$46.0 million , costs and expenses were$24.6 million , other income was$15.0 million , income tax benefit was$4.2 million and the deduction of income attributable to non-controlling interests was$3.6 million . Core revenues decreased by$23.3 million in the second quarter of 2020, primarily due to decreases of$9.3 million in interest income from conduit loans and CMBS,$7.3 million in servicing fees and$6.5 million in rental income from our REIS Equity Portfolio due to fewer properties held and an owned hotel which was closed during the quarter due to COVID-19. 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 core 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 primarily reflects a$6.8 million decrease in interest recoveries on CMBS.
Core costs and expenses decreased by
.
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Core 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 Core Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Core other income decreased by$0.1 million in the second quarter of 2020. Income taxes, which principally relate to the taxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs, decreased$6.1 million from a provision of$1.9 million to a benefit of$4.2 million due to tax losses of our TRSs in the second quarter of 2020.
Income attributable to non-controlling interests increased
Corporate Core corporate costs and expenses decreased by$5.7 million , from$51.1 million during the second quarter of 2019 to$45.4 million in the second quarter of 2020 primarily due to a favorable change in realized gain (loss) on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing. 85 Table of Contents
Six Months Ended
The following table presents our summarized results of operations and
reconciliation to Core Earnings for the six months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 379,804 $ 43,166 $ 127,707 $ 88,585 $ - $ 639,262
Costs and expenses (168,971) (40,191) (121,767) (65,920) (126,960) (523,809)
Other (loss) income (33,183) (2,593) (36,848) 1,904 33,752 (36,968)
Income (loss) before
income taxes 177,650 382 (30,908) 24,569 (93,208) 78,485
Income tax benefit 1,165 89 - 6,773 - 8,027
Income attributable to
non-controlling interests (7) - (10,222) (3,396) - (13,625)
Net income (loss) attributable
to Starwood Property
Trust, Inc. 178,808 471 (41,130) 27,946 (93,208) 72,887
Add / (Deduct):
Non-controlling interests
attributable to Woodstar II
Class A Units - - 10,222 - - 10,222
Non-cash equity compensation
expense 2,548 947 131 2,510 10,016 16,152
Management incentive fee - - - - 15,799 15,799
Acquisition and investment
pursuit costs 564 - (177) (72) - 315
Depreciation and amortization 725 130 38,617 7,144 - 46,616
Credit loss provision, net 51,511 7,360 - - - 58,871
Interest income adjustment for
securities 1,273 - - 7,942 - 9,215
Extinguishment of debt, net - - - - (493) (493)
Income tax benefit associated
with fair value adjustment (3,907) - - (1,834) - (5,741)
Other non-cash items 7 - (976) 478 312 (179)
Reversal of GAAP unrealized
(gains) / losses on:
Loans 2,507 - - (20,823) - (18,316)
Securities 22,425 - - 39,275 - 61,700
Derivatives (19,520) 1,433 33,970 22,537 (27,889) 10,531
Foreign currency 27,059 163 67 24 - 27,313
(Earnings) loss from
unconsolidated entities (722) 1,118 - (30,146) - (29,750)
Recognition of Core realized
gains / (losses) on:
Loans (3,499) (62) - 16,558 - 12,997
Securities - - - (4,393) - (4,393)
Derivatives 7,772 118 (404) (6,097) - 1,389
Foreign currency (6,240) (142) (69) (24) - (6,475)
(Loss) earnings from
unconsolidated entities (580) (733) - 16,730 - 15,417
Sales of properties - - - (5,789) - (5,789)
Core Earnings (Loss) $ 260,731 $ 10,803 $
40,251
0.04 $ 0.14 $ 0.24 $ (0.32) $ 0.98
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The following table presents our summarized results of operations and
reconciliation to Core Earnings for the six months ended
Commercial
and
Residential Infrastructure Investing
Lending Lending Property and Servicing
Segment Segment Segment Segment Corporate Total
Revenues $ 362,610 $ 54,652 $ 143,013 $ 132,583 $ 26 $ 692,884
Costs and expenses (138,217) (45,370) (135,687) (79,458) (108,076) (506,808)
Other income (loss) 7,777 (6,065) (52,617) 52,592 24,869 26,556
Income (loss) before
income taxes 232,170 3,217 (45,291) 105,717 (83,181) 212,632
Income tax (provision) benefit (1,584) 271 (258) (2,296) - (3,867)
(Income) loss attributable to
non-controlling interests (392) - (11,072) 98 - (11,366)
Net income (loss) attributable
to Starwood Property
Trust, Inc. 230,194 3,488 (56,621) 103,519 (83,181) 197,399
Add / (Deduct):
Non-controlling interests
attributable to Woodstar II
Class A Units - - 11,072 - - 11,072
Non-cash equity compensation
expense 1,617 1,114 146 3,052 7,498 13,427
Management incentive fee - - - - 173 173
Acquisition and investment
pursuit costs (62) 2 (177) (305) (356) (898)Depreciation and amortization 356 - 47,627 9,737 - 57,720 Credit loss provision, net 2,085 1,196 - - - 3,281 Interest income adjustment for securities (391) - - 9,353 - 8,962 Extinguishment of debt, net - - - - (1,457) (1,457) Other non-cash items - - (886) 508 318 (60) Reversal of GAAP unrealized (gains) / losses on: - Loans (6,749) - - (26,408) - (33,157) Securities 2,642 - - (33,955) - (31,313) Derivatives 3,986 3,228 13,033 10,251 (26,002) 4,496 Foreign currency 1,688 (217) (1) - - 1,470 (Earnings) loss from unconsolidated entities (6,069) - 42,761 (3,348) - 33,344 Recognition of Core realized gains / (losses) on: - Loans (1,203) (755) - 27,585 - 25,627 Securities 597 - - 7,109 - 7,706 Derivatives 823 (1,460) 1,851 (9,239) - (8,025) Foreign currency (814) (827) 1 9 - (1,631) Earnings (loss) from unconsolidated entities 4,780 - (68,905) 12,870 - (51,255) Sales of properties - - - (76) - (76) Core Earnings (Loss)$ 233,480 $ 5,769 $
(10,099)
0.02 $ (0.04) $ 0.38 $ (0.35) $ 0.81
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Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment's Core Earnings increased by$27.2 million , from$233.5 million during the six months of 2019 to$260.7 million in the six months of 2020. After making adjustments for the calculation of Core Earnings, revenues were$381.1 million , costs and expenses were$113.6 million and other loss was$4.0 million . Core revenues, consisting principally of interest income on loans, increased by$18.9 million in the six months of 2020, primarily due to an increase in interest income from loans of$24.9 million , partially offset by a decrease in interest income from investment securities of$6.6 million . The increase in interest income from loans was principally due to (i) higher prepayment related income and (ii) higher average balances of both commercial and residential loans, partially offset by (iii) lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans). The decrease in interest income from investment securities was primarily due to lower prepayment related income and lower average LIBOR rates. Core costs and expenses decreased by$20.6 million in the six months of 2020, primarily due to a$24.3 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. Such decrease was partially offset by higher general and administrative and other expenses. Core other income (loss) decreased by$11.4 million in the six months of 2020, primarily due to declines of$6.8 million in gains (losses) on sales and securitizations of commercial and residential loans and$5.4 million in earnings from unconsolidated entities.
Infrastructure Lending Segment
The Infrastructure Lending Segment's Core Earnings increased by$5.0 million , from$5.8 million in the six months of 2019 to$10.8 million in the six months of 2020. After making adjustments for the calculation of Core Earnings, revenues were$43.2 million , costs and expenses were$31.7 million and other loss was$0.7 million . Core revenues, consisting principally of interest income on loans, decreased by$11.5 million in the six months of 2020, primarily due to decreases in interest income from loans of$10.7 million and investment securities of$0.4 million . The decrease in interest income from loans was primarily due to lower average loan balances outstanding as a result of sales and repayments and a decrease in average LIBOR rates partially offset by an increase in average spreads on our infrastructure loans. Core costs and expenses decreased by$11.3 million in the six months of 2020, primarily due to a decrease in interest expense on the secured debt facilities used to finance this segment's investment portfolio principally due to lower average LIBOR rates and lower average borrowings as a result of loan sales
and repayments. Core other loss decreased by$5.4 million in the six months of 2020, primarily due to a decreased loss on extinguishment of debt resulting from the write-off of deferred financing fees relating to partial debt prepayments from proceeds of loan repayments and sales. 88 Table of Contents Property Segment
Core Earnings by Portfolio (amounts in thousands)
For the Six Months Ended
June 30,
2020 2019 Change
Master Lease Portfolio $ 8,538 $ 8,352 $ 186
Medical Office Portfolio 10,547 13,335 (2,788)
Woodstar I Portfolio 11,105 15,156 (4,051)
Woodstar II Portfolio 12,382 10,963 1,419
Ireland Portfolio - 13,003 (13,003)Investment in unconsolidated entities - (68,905)
68,905 Other/Corporate (2,321) (2,003) (318) Core Earnings$ 40,251 $ (10,099) $ 50,350 The Property Segment's Core Earnings increased by$50.3 million , from a loss of$10.1 million during the six months of 2019 to income of$40.2 million in the six months of 2020. After making adjustments for the calculation of Core Earnings, revenues were$126.8 million , costs and expenses were$83.7 million and other loss was$2.9 million . Core revenues decreased by$15.8 million in the six months of 2020, primarily due to the sale of the Ireland Portfolio inDecember 2019 , partially offset by increased rental income in the Woodstar Portfolios due to rental rate increases effectiveMay 2019 .
Core costs and expenses decreased by
Core other loss decreased by$60.9 million in the six months of 2020 primarily due to a$68.9 million other-than-temporary loss recognized on our investment in theRetail Fund in the 2019 period that did not recur in the 2020 period, partially offset by a$6.0 million unfavorable change in realized gains (losses) on certain interest rate and foreign currency derivatives and a$2.2 million loss on extinguishment of debt in the second quarter of 2020 in connection with the refinancing of our Woodstar I Portfolio.
Investing and Servicing Segment
The Investing and Servicing Segment's Core Earnings decreased by$38.7 million , from$110.7 million during the six months of 2019 to$72.0 million in the six months of 2020. After making adjustments for the calculation of Core Earnings, revenues were$97.2 million , costs and expenses were$56.5 million , other income was$37.2 million , income tax benefit was$4.9 million and the deduction of income attributable to non-controlling interests was$10.8 million . Core revenues decreased by$45.3 million in the six months of 2020, primarily due to decreases of$28.1 million in servicing fees,$7.7 million in interest income from conduit loans and CMBS and$9.6 million in rental income from our REIS Equity Portfolio due to fewer properties held and an owned hotel which was closed during the quarter due to COVID-19. The decrease in interest income primarily reflects a$5.9 million decrease in interest recoveries on CMBS. Core costs and expenses decreased by$10.5 million in the six months of 2020, primarily due to decreases of,$5.0 million in costs of rental operations due to fewer properties held,$2.9 million in interest expense on borrowings related to properties held and conduit loans and$2.8 million in general and administrative expenses reflecting lower incentive compensation.
Core other income decreased by
Income taxes, which principally relate to the taxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs, decreased$7.2 million from a provision of$2.3 million to a benefit of$4.9 million due to tax losses of our TRSs in the six months of 2020. 89 Table of Contents
Income attributable to non-controlling interests increased
Corporate Core corporate costs and expenses decreased by$7.5 million , from$103.0 million during the six months of 2019 to$95.5 million in the six months of 2020 primarily due to a favorable change in realized gain (loss) on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing.
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, 2019 . Refer to our Form 10-K for a description of these strategies. We expect to preserve and build our liquidity to best position the Company to weather near-term market uncertainty, satisfy our loan future funding and financing obligations and to potentially make opportunistic new investments, which will cause us to take some or all of the following actions: raise capital from offerings of securities, borrow additional capital, sell assets, pay our management and incentive fees in shares of our common stock (as was done for the quarter endedMarch 31, 2020 ) and/or change our dividend practice, including by reducing the amount of, or temporarily suspending, our future dividends or paying our future dividends in kind for some period of time. We currently expect the pace of loan repayments will slow while the impacts of the COVID-19 pandemic are ongoing. COVID-19 Pandemic 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 II, Item 1A of this Quarterly Report on Form 10-Q. Credit Facilities During the three months endedJune 30, 2020 , we entered into agreements with seven of the 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. 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.
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Our primary sources of liquidity are as follows:
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