UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-34436
Starwood Property Trust, Inc.
(Exact name of registrant as specified in its charter)
| | |
Maryland | | 27-0247747 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
| | |
591 West Putnam Avenue | | |
Greenwich, Connecticut | | 06830 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code:
(203) (203) 422-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common stock, $0.01 par value per share | STWD | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒⌧ No ☐◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | |
Large accelerated filer | | Accelerated filer |
Non-accelerated filer | | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒⌧
The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of November 2, 2017July 31, 2020 was 260,998,683.284,457,492.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.
These forward-looking statements are based largely on our current beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors that may cause actual results to vary from our forward-looking statements include, but are not limited to:
| factors described in our Annual Report on Form 10-K for the year ended December 31, |
| the severity and duration of the pandemic of the novel strain of coronavirus (“COVID-19”), actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact and the adverse impacts that the COVID-19 pandemic has had, and will likely continue to have, on the global economy, on the borrowersunderlying our real estate-related assets and infrastructure loans and tenants of our owned properties, including their ability to make payments on their loans or to pay rent, as the case may be, and on our operations and financial performance; |
● | defaults by borrowers in paying debt service on outstanding indebtedness; |
| impairment in the value of real estate property securing our loans or in which we invest; |
| availability of mortgage origination and acquisition opportunities acceptable to us; |
| potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements; |
| our ability to integrate our prior acquisition of the project finance origination, underwriting and capital markets business of GE Capital Global Holdings, LLC into our business and to achieve the benefits that we anticipate from the acquisition; |
● | national and local economic and business |
| general and local commercial and residential real estate property conditions; |
| changes in federal government policies; |
| changes in federal, state and local governmental laws and regulations; |
| increased competition from entities engaged in mortgage lending and securities investing activities; |
| changes in interest rates; and |
2
| the availability of, and costs associated with, sources of liquidity. |
In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur. Except to the extent required by applicable law or regulation, we undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise.
23
TABLE OF CONTENTS
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| 40 | |
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| 44 | |
| 46 | |
| 47 | |
| 48 | |
| 55 | |
| 57 | |
| 58 | |
| 64 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 65 | |
105 | ||
109 | ||
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110 | ||
110 | ||
113 | ||
113 | ||
113 | ||
113 | ||
114 |
34
PART I - FINANCIAL INFORMATION
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, amounts in thousands, except share data)
| | | | | | |
| | As of | | As of | ||
| | June 30, 2020 | | December 31, 2019 | ||
Assets: | | | | | | |
Cash and cash equivalents | | $ | 347,734 | | $ | 478,388 |
Restricted cash | |
| 176,397 | |
| 95,643 |
Loans held-for-investment, net of credit loss allowances of $111,272 and $33,415 ($267,730 and $671,572 held at fair value) | |
| 10,420,802 | |
| 10,586,074 |
Loans held-for-sale ($626,883 and $764,622 held at fair value) | |
| 671,759 | |
| 884,150 |
Investment securities, net of credit loss allowances of $6,891 and $0 ($207,602 and $239,600 held at fair value) | |
| 752,025 | |
| 810,238 |
Properties, net | | | 2,224,323 | | | 2,266,440 |
Intangible assets ($13,955 and $16,917 held at fair value) | |
| 76,293 | |
| 85,700 |
Investment in unconsolidated entities | |
| 104,913 | |
| 84,329 |
Goodwill | |
| 259,846 | |
| 259,846 |
Derivative assets | |
| 90,905 | |
| 28,943 |
Accrued interest receivable | |
| 71,748 | |
| 64,087 |
Other assets | |
| 184,147 | |
| 211,323 |
Variable interest entity (“VIE”) assets, at fair value | |
| 64,175,387 | |
| 62,187,175 |
Total Assets | | $ | 79,556,279 | | $ | 78,042,336 |
Liabilities and Equity | | | | | | |
Liabilities: | | | | | | |
Accounts payable, accrued expenses and other liabilities | | $ | 211,722 | | $ | 212,006 |
Related-party payable | |
| 20,941 | |
| 40,925 |
Dividends payable | |
| 138,778 | |
| 137,427 |
Derivative liabilities | |
| 3,880 | |
| 8,740 |
Secured financing agreements, net | |
| 8,836,320 | |
| 8,906,048 |
Collateralized loan obligations, net | | | 929,307 | | | 928,060 |
Unsecured senior notes, net | |
| 1,932,560 | |
| 1,928,622 |
VIE liabilities, at fair value | |
| 62,617,975 | |
| 60,743,494 |
Total Liabilities | |
| 74,691,483 | |
| 72,905,322 |
Commitments and contingencies (Note 21) | | | | | | |
Equity: | | | | | | |
Starwood Property Trust, Inc. Stockholders’ Equity: | | | | | | |
Preferred stock, $0.01 per share, 100,000,000 shares authorized, 0 shares issued and outstanding | |
| — | |
| — |
Common stock, $0.01 per share, 500,000,000 shares authorized, 291,573,083 issued and 284,467,522 outstanding as of June 30, 2020 and 287,380,891 issued and 282,200,751 outstanding as of December 31, 2019 | |
| 2,916 | |
| 2,874 |
Additional paid-in capital | |
| 5,193,572 | |
| 5,132,532 |
Treasury stock (7,105,561 shares and 5,180,140 shares) | |
| (133,024) | |
| (104,194) |
Accumulated other comprehensive income | |
| 42,866 | |
| 50,932 |
Accumulated deficit | |
| (614,093) | |
| (381,719) |
Total Starwood Property Trust, Inc. Stockholders’ Equity | |
| 4,492,237 | |
| 4,700,425 |
Non-controlling interests in consolidated subsidiaries | |
| 372,559 | |
| 436,589 |
Total Equity | |
| 4,864,796 | |
| 5,137,014 |
Total Liabilities and Equity | | $ | 79,556,279 | | $ | 78,042,336 |
|
|
|
|
|
|
|
|
| As of |
| As of | ||
|
| September 30, 2017 |
| December 31, 2016 | ||
Assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 413,845 |
| $ | 615,522 |
Restricted cash |
|
| 54,591 |
|
| 35,233 |
Loans held-for-investment, net |
|
| 6,382,371 |
|
| 5,847,995 |
Loans held-for-sale, at fair value |
|
| 608,624 |
|
| 63,279 |
Loans transferred as secured borrowings |
|
| 74,339 |
|
| 35,000 |
Investment securities ($290,622 and $297,638 held at fair value) |
|
| 701,818 |
|
| 807,618 |
Properties, net |
|
| 2,521,342 |
|
| 1,944,720 |
Intangible assets ($33,781 and $55,082 held at fair value) |
|
| 181,865 |
|
| 219,248 |
Investment in unconsolidated entities |
|
| 243,450 |
|
| 204,605 |
Goodwill |
|
| 140,437 |
|
| 140,437 |
Derivative assets |
|
| 38,293 |
|
| 89,361 |
Accrued interest receivable |
|
| 35,047 |
|
| 28,224 |
Other assets |
|
| 112,265 |
|
| 101,763 |
Variable interest entity (“VIE”) assets, at fair value |
|
| 51,197,981 |
|
| 67,123,261 |
Total Assets |
| $ | 62,706,268 |
| $ | 77,256,266 |
Liabilities and Equity |
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
| $ | 203,782 |
| $ | 198,134 |
Related-party payable |
|
| 29,989 |
|
| 37,818 |
Dividends payable |
|
| 125,674 |
|
| 125,075 |
Derivative liabilities |
|
| 22,890 |
|
| 3,904 |
Secured financing agreements, net |
|
| 5,514,695 |
|
| 4,154,126 |
Unsecured senior notes, net |
|
| 2,044,523 |
|
| 2,011,544 |
Secured borrowings on transferred loans, net |
|
| 74,200 |
|
| 35,000 |
VIE liabilities, at fair value |
|
| 50,150,781 |
|
| 66,130,592 |
Total Liabilities |
|
| 58,166,534 |
|
| 72,696,193 |
Commitments and contingencies (Note 21) |
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
Starwood Property Trust, Inc. Stockholders’ Equity: |
|
|
|
|
|
|
Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and outstanding |
|
| — |
|
| — |
Common stock, $0.01 per share, 500,000,000 shares authorized, 265,406,623 issued and 260,799,738 outstanding as of September 30, 2017 and 263,893,806 issued and 259,286,921 outstanding as of December 31, 2016 |
|
| 2,654 |
|
| 2,639 |
Additional paid-in capital |
|
| 4,705,044 |
|
| 4,691,180 |
Treasury stock (4,606,885 shares) |
|
| (92,104) |
|
| (92,104) |
Accumulated other comprehensive income |
|
| 65,271 |
|
| 36,138 |
Accumulated deficit |
|
| (184,073) |
|
| (115,579) |
Total Starwood Property Trust, Inc. Stockholders’ Equity |
|
| 4,496,792 |
|
| 4,522,274 |
Non-controlling interests in consolidated subsidiaries |
|
| 42,942 |
|
| 37,799 |
Total Equity |
|
| 4,539,734 |
|
| 4,560,073 |
Total Liabilities and Equity |
| $ | 62,706,268 |
| $ | 77,256,266 |
Note: In addition to the VIE assets and liabilities which are separately presented, our condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 include assets of $1.1 billion and liabilities of $0.9 billion related to a consolidated collateralized loan obligation (“CLO”), which is considered to be a VIE. The CLO’s assets can only be used to settle obligations of the CLO, and the CLO’s liabilities do not have recourse to Starwood Property Trust, Inc. Refer to Note 14 for additional discussion of VIEs.
See notes to condensed consolidated financial statements.
5
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited, amounts in thousands, except per share data)
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Revenues: | | | | | | | | | | | | |
Interest income from loans | | $ | 171,103 | | $ | 191,466 | | $ | 388,530 | | $ | 374,882 |
Interest income from investment securities | |
| 14,644 | |
| 22,545 | |
| 29,884 | |
| 40,177 |
Servicing fees | |
| 6,658 | |
| 9,008 | |
| 11,451 | |
| 33,441 |
Rental income | | | 72,710 | | | 87,297 | | | 146,856 | | | 171,130 |
Other revenues | |
| 491 | |
| 865 | |
| 1,445 | |
| 2,031 |
Total revenues | |
| 265,606 | |
| 311,181 | |
| 578,166 | |
| 621,661 |
Costs and expenses: | | | | | | | | | | | | |
Management fees | |
| 23,115 | |
| 22,523 | |
| 63,843 | |
| 45,989 |
Interest expense | |
| 101,493 | |
| 130,126 | |
| 221,518 | |
| 264,798 |
General and administrative | |
| 32,677 | |
| 37,578 | |
| 71,379 | |
| 72,508 |
Acquisition and investment pursuit costs | |
| 1,590 | |
| 74 | |
| 2,499 | |
| 416 |
Costs of rental operations | | | 29,632 | | | 30,655 | | | 57,846 | | | 60,306 |
Depreciation and amortization | |
| 23,421 | |
| 28,552 | |
| 47,401 | |
| 57,806 |
Credit loss provision, net | |
| 10,202 | |
| 2,518 | |
| 58,871 | |
| 3,281 |
Other expense | |
| 102 | |
| 1,443 | |
| 490 | |
| 1,654 |
Total costs and expenses | |
| 222,232 | |
| 253,469 | |
| 523,847 | |
| 506,758 |
Other income (loss): | | | | | | | | | | | | |
Change in net assets related to consolidated VIEs | |
| 51,261 | |
| 55,158 | |
| 5,768 | |
| 102,994 |
Change in fair value of servicing rights | |
| (2,569) | |
| (916) | |
| (2,962) | |
| (1,683) |
Change in fair value of investment securities, net | |
| 827 | |
| 667 | |
| 3,331 | |
| 729 |
Change in fair value of mortgage loans, net | |
| 34,450 | |
| 21,891 | |
| 18,316 | |
| 33,157 |
Earnings (loss) from unconsolidated entities | |
| 28,776 | |
| 8,817 | |
| 28,873 | |
| (34,383) |
Gain on sale of investments and other assets, net | |
| 6,472 | |
| 2,515 | |
| 6,768 | |
| 7,000 |
Loss on derivative financial instruments, net | |
| (16,098) | |
| (32) | |
| (6,388) | |
| (2,239) |
Foreign currency gain (loss), net | |
| 7,173 | |
| (7,017) | |
| (27,313) | |
| (1,470) |
Loss on extinguishment of debt | | | (2,207) | | | (2,816) | | | (2,377) | | | (6,114) |
Other income (loss), net | |
| 204 | |
| — | |
| 330 | |
| (73) |
Total other income | |
| 108,289 | |
| 78,267 | |
| 24,346 | |
| 97,918 |
Income before income taxes | |
| 151,663 | |
| 135,979 | |
| 78,665 | |
| 212,821 |
Income tax benefit (provision) | |
| 1,298 | |
| (3,533) | |
| 8,027 | |
| (3,867) |
Net income | |
| 152,961 | |
| 132,446 | |
| 86,692 | |
| 208,954 |
Net income attributable to non-controlling interests | |
| (13,305) | |
| (5,430) | |
| (13,805) | |
| (11,555) |
Net income attributable to Starwood Property Trust, Inc. | | $ | 139,656 | | $ | 127,016 | | $ | 72,887 | | $ | 197,399 |
| | | | | | | | | | | | |
Earnings per share data attributable to Starwood Property Trust, Inc.: | | | | | | | | | | | | |
Basic | | $ | 0.49 | | $ | 0.45 | | $ | 0.25 | | $ | 0.70 |
Diluted | | $ | 0.49 | | $ | 0.45 | | $ | 0.25 | | $ | 0.70 |
See notes to condensed consolidated financial statements.
4
6
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of OperationsComprehensive Income
(Unaudited, amounts in thousands, except per share data)thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
| For the Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from loans |
| $ | 138,599 |
| $ | 121,225 |
| $ | 371,094 |
| $ | 361,314 |
Interest income from investment securities |
|
| 12,451 |
|
| 19,175 |
|
| 40,045 |
|
| 53,879 |
Servicing fees |
|
| 14,842 |
|
| 22,918 |
|
| 47,572 |
|
| 70,921 |
Rental income |
|
| 60,153 |
|
| 39,742 |
|
| 176,161 |
|
| 110,262 |
Other revenues |
|
| 722 |
|
| 1,645 |
|
| 2,184 |
|
| 3,814 |
Total revenues |
|
| 226,767 |
|
| 204,705 |
|
| 637,056 |
|
| 600,190 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
| 30,980 |
|
| 27,780 |
|
| 79,997 |
|
| 76,510 |
Interest expense |
|
| 76,431 |
|
| 59,082 |
|
| 213,608 |
|
| 173,237 |
General and administrative |
|
| 32,892 |
|
| 51,470 |
|
| 95,841 |
|
| 119,677 |
Acquisition and investment pursuit costs |
|
| 1,024 |
|
| 1,509 |
|
| 2,232 |
|
| 5,682 |
Costs of rental operations |
|
| 23,799 |
|
| 18,011 |
|
| 67,701 |
|
| 46,518 |
Depreciation and amortization |
|
| 22,871 |
|
| 15,352 |
|
| 67,131 |
|
| 53,185 |
Loan loss allowance, net |
|
| (171) |
|
| 2,127 |
|
| (3,170) |
|
| 3,395 |
Other expense |
|
| 376 |
|
| 711 |
|
| 1,276 |
|
| 811 |
Total costs and expenses |
|
| 188,202 |
|
| 176,042 |
|
| 524,616 |
|
| 479,015 |
Income before other income (loss), income taxes and non-controlling interests |
|
| 38,565 |
|
| 28,663 |
|
| 112,440 |
|
| 121,175 |
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Change in net assets related to consolidated VIEs |
|
| 56,177 |
|
| 47,848 |
|
| 203,108 |
|
| 94,388 |
Change in fair value of servicing rights |
|
| (4,867) |
|
| (14,283) |
|
| (21,301) |
|
| (33,213) |
Change in fair value of investment securities, net |
|
| (397) |
|
| (2,786) |
|
| (4,061) |
|
| (714) |
Change in fair value of mortgage loans held-for-sale, net |
|
| 19,485 |
|
| 49,996 |
|
| 45,484 |
|
| 70,122 |
(Loss) earnings from unconsolidated entities |
|
| (4,689) |
|
| 4,305 |
|
| 27,763 |
|
| 12,849 |
Gain on sale of investments and other assets, net |
|
| 11,877 |
|
| 10 |
|
| 17,004 |
|
| 165 |
Loss on derivative financial instruments, net |
|
| (24,224) |
|
| (2,328) |
|
| (66,159) |
|
| (6,793) |
Foreign currency gain (loss), net |
|
| 10,660 |
|
| (3,214) |
|
| 28,434 |
|
| (20,580) |
Total other-than-temporary impairment (“OTTI”) |
|
| (66) |
|
| — |
|
| (175) |
|
| (54) |
Noncredit portion of OTTI recognized in other comprehensive income |
|
| 66 |
|
| — |
|
| 66 |
|
| 54 |
Net impairment losses recognized in earnings |
|
| — |
|
| — |
|
| (109) |
|
| — |
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| (5,916) |
|
| — |
Other income, net |
|
| 28 |
|
| 269 |
|
| 484 |
|
| 10,998 |
Total other income (loss) |
|
| 64,050 |
|
| 79,817 |
|
| 224,731 |
|
| 127,222 |
Income before income taxes |
|
| 102,615 |
|
| 108,480 |
|
| 337,171 |
|
| 248,397 |
Income tax provision |
|
| (9,816) |
|
| (2,667) |
|
| (18,285) |
|
| (3,467) |
Net income |
|
| 92,799 |
|
| 105,813 |
|
| 318,886 |
|
| 244,930 |
Net income attributable to non-controlling interests |
|
| (4,371) |
|
| (47) |
|
| (10,720) |
|
| (1,034) |
Net income attributable to Starwood Property Trust, Inc. |
| $ | 88,428 |
| $ | 105,766 |
| $ | 308,166 |
| $ | 243,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share data attributable to Starwood Property Trust, Inc.: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.34 |
| $ | 0.44 |
| $ | 1.18 |
| $ | 1.02 |
Diluted |
| $ | 0.33 |
| $ | 0.44 |
| $ | 1.17 |
| $ | 1.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
| $ | 0.48 |
| $ | 0.48 |
| $ | 1.44 |
| $ | 1.44 |
| | | | | | | | | | | | |
|
| For the Three Months Ended |
| For the Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | ||||
Net income | | $ | 152,961 | | $ | 132,446 | | $ | 86,692 | | $ | 208,954 |
Other comprehensive income (loss) (net change by component): | | | | | | | | | | | | |
Available-for-sale securities | |
| 6,982 | |
| (79) | |
| (8,066) | |
| (466) |
Foreign currency translation | |
| — | |
| 1,405 | |
| — | |
| (1,070) |
Other comprehensive income (loss) | |
| 6,982 | |
| 1,326 | |
| (8,066) | |
| (1,536) |
Comprehensive income | |
| 159,943 | |
| 133,772 | |
| 78,626 | |
| 207,418 |
Less: Comprehensive income attributable to non-controlling interests | |
| (13,305) | |
| (5,430) | |
| (13,805) | |
| (11,555) |
Comprehensive income attributable to Starwood Property Trust, Inc. | | $ | 146,638 | | $ | 128,342 | | $ | 64,821 | | $ | 195,863 |
See notes to condensed consolidated financial statements.
57
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive IncomeEquity
For the Three Months Ended June 30, 2020 and 2019
(Unaudited, amounts in thousands)thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
| For the Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Net income |
| $ | 92,799 |
| $ | 105,813 |
| $ | 318,886 |
| $ | 244,930 |
Other comprehensive income (net change by component): |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges |
|
| (22) |
|
| 185 |
|
| 56 |
|
| (136) |
Available-for-sale securities |
|
| 3,975 |
|
| 6,105 |
|
| 10,728 |
|
| 8,656 |
Foreign currency translation |
|
| 5,337 |
|
| 1,331 |
|
| 18,349 |
|
| 1,999 |
Other comprehensive income |
|
| 9,290 |
|
| 7,621 |
|
| 29,133 |
|
| 10,519 |
Comprehensive income |
|
| 102,089 |
|
| 113,434 |
|
| 348,019 |
|
| 255,449 |
Less: Comprehensive income attributable to non-controlling interests |
|
| (4,371) |
|
| (47) |
|
| (10,720) |
|
| (1,034) |
Comprehensive income attributable to Starwood Property Trust, Inc. |
| $ | 97,718 |
| $ | 113,387 |
| $ | 337,299 |
| $ | 254,415 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Total | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Starwood | | | | | | | ||
| | | | | | | | | | | | | | | | | Accumulated | | Property | | | | | | | |||
| | Common stock | | Additional | | | | | | | | | Other | | Trust, Inc. | | Non- | | | | ||||||||
| | | | Par | | Paid-in | | Treasury Stock | | Accumulated | | Comprehensive | | Stockholders’ | | Controlling | | Total | ||||||||||
|
| Shares |
| Value |
| Capital |
| Shares |
| Amount |
| Deficit |
| Income |
| Equity |
| Interests |
| Equity | ||||||||
Balance, March 31, 2020 |
| 289,349,439 | | $ | 2,894 | | $ | 5,159,069 |
| 7,105,561 | | $ | (133,024) | | $ | (616,765) | | $ | 35,884 | | $ | 4,448,058 | | $ | 369,293 | | $ | 4,817,351 |
Proceeds from DRIP Plan | | 17,313 | | | — | | | 216 | | — | | | — | | | — | | | — | | | 216 | | | — | | | 216 |
Equity offering costs | | — | | | — | | | (1) | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) |
Share-based compensation | | 141,009 | | | 2 | | | 7,342 | | — | | | — | | | — | | | — | | | 7,344 | | | — | | | 7,344 |
Manager fees paid in stock |
| 2,065,322 | | | 20 | | | 26,946 | | — | | | — | | | — | | | — | | | 26,966 | | | — | | | 26,966 |
Net income |
| — | | | — | | | — | | — | | | — | | | 139,656 | | | — | | | 139,656 | | | 13,305 | | | 152,961 |
Dividends declared, $0.48 per share |
| — | | | — | | | — | | — | | | — | | | (136,984) | | | — | | | (136,984) | | | — | | | (136,984) |
Other comprehensive income, net |
| — | | | — | | | — | | — | | | — | | | — | | | 6,982 | | | 6,982 | | | — | | | 6,982 |
VIE non-controlling interests | | — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) |
Distributions to non-controlling interests |
| — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (10,038) | | | (10,038) |
Balance, June 30, 2020 |
| 291,573,083 | | $ | 2,916 | | $ | 5,193,572 |
| 7,105,561 | | $ | (133,024) | | $ | (614,093) | | $ | 42,866 | | $ | 4,492,237 | | $ | 372,559 | | $ | 4,864,796 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2019 |
| 285,481,485 | | $ | 2,855 | | $ | 5,080,173 | | 5,180,140 | | $ | (104,194) | | $ | (413,553) | | $ | 55,798 | | $ | 4,621,079 | | $ | 295,888 | | $ | 4,916,967 |
Proceeds from DRIP Plan |
| 9,311 | | | — | | | 212 |
| — | | | — | | | — | | | — | | | 212 | | | — | | | 212 |
Redemption of Class A Units for common stock | | 754,345 | | | 8 | | | 16,365 |
| — | | | — | | | — | | | — | | | 16,373 | | | (16,373) | | | — |
Equity offering costs |
| — | | | — | | | (3) |
| — | | | — | | | — | | | — | | | (3) | | | — | | | (3) |
Share-based compensation |
| 206,220 | | | 1 | | | 7,024 |
| — | | | — | | | — | | | — | | | 7,025 | | | — | |
| 7,025 |
Net income |
| — | | | — | | | — |
| — | | | — | | | 127,016 | | | — | | | 127,016 | | | 5,430 | |
| 132,446 |
Dividends declared, $0.48 per share |
| — | | | — | | | — |
| — | | | — | | | (135,321) | | | — | | | (135,321) | | | — | |
| (135,321) |
Other comprehensive income, net |
| — | | | — | | | — |
| — | | | — | | | — | | | 1,326 | | | 1,326 | | | — | |
| 1,326 |
VIE non-controlling interests |
| — | | | — | | | — |
| — | | | — | | | — | | | — | | | — | | | (40) | | | (40) |
Contributions from non-controlling interests |
| — | | | — | | | — |
| — | | | — | | | — | | | — | | | — | | | 4,541 | | | 4,541 |
Distributions to non-controlling interests |
| — | | | — | | | — |
| — | | | — | | | — | | | — | | | — | | | (23,902) | |
| (23,902) |
Balance, June 30, 2019 |
| 286,451,361 | | $ | 2,864 | | $ | 5,103,771 |
| 5,180,140 | | $ | (104,194) | | $ | (421,858) | | $ | 57,124 | | $ | 4,637,707 | | $ | 265,544 | | $ | 4,903,251 |
See notes to condensed consolidated financial statements.
6
8
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity (Continued)
For the Six Months Ended June 30, 2020 and 2019
(Unaudited, amounts in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Starwood |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
| Property |
|
|
|
|
|
|
| |||
|
| Common stock |
| Additional |
|
|
|
|
|
|
|
| Other |
| Trust, Inc. |
| Non- |
|
|
|
| ||||||||
|
|
|
| Par |
| Paid-in |
| Treasury Stock |
| Accumulated |
| Comprehensive |
| Stockholders’ |
| Controlling |
| Total |
| ||||||||||
|
| Shares |
| Value |
| Capital |
| Shares |
| Amount |
| Deficit |
| Income |
| Equity |
| Interests |
| Equity |
| ||||||||
Balance, January 1, 2017 |
| 263,893,806 |
| $ | 2,639 |
| $ | 4,691,180 |
| 4,606,885 |
| $ | (92,104) |
| $ | (115,579) |
| $ | 36,138 |
| $ | 4,522,274 |
| $ | 37,799 |
| $ | 4,560,073 |
|
Proceeds from DRIP Plan |
| 24,217 |
|
| — |
|
| 541 |
| — |
|
| — |
|
| — |
|
| — |
|
| 541 |
|
| — |
|
| 541 |
|
Equity offering costs |
| — |
|
| — |
|
| (12) |
| — |
|
| — |
|
| — |
|
| — |
|
| (12) |
|
| — |
|
| (12) |
|
Equity component of 2023 Convertible Senior Notes issuance |
| — |
|
| — |
|
| 3,755 |
| — |
|
| — |
|
| — |
|
| — |
|
| 3,755 |
|
| — |
|
| 3,755 |
|
Equity component of 2018 Convertible Senior Notes repurchase |
| — |
|
| — |
|
| (18,105) |
| — |
|
| — |
|
| — |
|
| — |
|
| (18,105) |
|
| — |
|
| (18,105) |
|
Share-based compensation |
| 849,045 |
|
| 9 |
|
| 13,281 |
| — |
|
| — |
|
| — |
|
| — |
|
| 13,290 |
|
| — |
|
| 13,290 |
|
Manager incentive fee paid in stock |
| 639,555 |
|
| 6 |
|
| 14,404 |
| — |
|
| — |
|
| — |
|
| — |
|
| 14,410 |
|
| — |
|
| 14,410 |
|
Net income |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 308,166 |
|
| — |
|
| 308,166 |
|
| 10,720 |
|
| 318,886 |
|
Dividends declared, $1.44 per share |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (376,660) |
|
| — |
|
| (376,660) |
|
| — |
|
| (376,660) |
|
Other comprehensive income, net |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 29,133 |
|
| 29,133 |
|
| — |
|
| 29,133 |
|
VIE non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,837 |
|
| 1,837 |
|
Contributions from non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 105 |
|
| 105 |
|
Distributions to non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7,519) |
|
| (7,519) |
|
Balance, September 30, 2017 |
| 265,406,623 |
| $ | 2,654 |
| $ | 4,705,044 |
| 4,606,885 |
| $ | (92,104) |
| $ | (184,073) |
| $ | 65,271 |
| $ | 4,496,792 |
| $ | 42,942 |
| $ | 4,539,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016 |
| 241,044,775 |
| $ | 2,410 |
| $ | 4,192,844 |
| 3,553,996 |
| $ | (72,381) |
| $ | (12,286) |
| $ | 29,729 |
| $ | 4,140,316 |
| $ | 30,627 |
| $ | 4,170,943 |
|
Proceeds from DRIP Plan |
| 14,707 |
|
| — |
|
| 299 |
| — |
|
| — |
|
| — |
|
| — |
|
| 299 |
|
| — |
|
| 299 |
|
Common stock repurchased |
| — |
|
| — |
|
| — |
| 1,052,889 |
|
| (19,723) |
|
| — |
|
| — |
|
| (19,723) |
|
| — |
|
| (19,723) |
|
Share-based compensation |
| 1,147,975 |
|
| 12 |
|
| 22,785 |
| — |
|
| — |
|
| — |
|
| — |
|
| 22,797 |
|
| — |
|
| 22,797 |
|
Manager incentive fee paid in stock |
| 788,460 |
|
| 8 |
|
| 14,649 |
| — |
|
| — |
|
| — |
|
| — |
|
| 14,657 |
|
| — |
|
| 14,657 |
|
Net income |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 243,896 |
|
| — |
|
| 243,896 |
|
| 1,034 |
|
| 244,930 |
|
Dividends declared, $1.44 per share |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (343,913) |
|
| — |
|
| (343,913) |
|
| — |
|
| (343,913) |
|
Other comprehensive income, net |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 10,519 |
|
| 10,519 |
|
| — |
|
| 10,519 |
|
VIE non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (144) |
|
| (144) |
|
Contributions from non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,417 |
|
| 10,417 |
|
Distributions to non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (5,400) |
|
| (5,400) |
|
Balance, September 30, 2016 |
| 242,995,917 |
| $ | 2,430 |
| $ | 4,230,577 |
| 4,606,885 |
| $ | (92,104) |
| $ | (112,303) |
| $ | 40,248 |
| $ | 4,068,848 |
| $ | 36,534 |
| $ | 4,105,382 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Total | | | | | | |
| |
| | | | | | | | | | | | | | | | | | | | Starwood | | | | | | |
| ||
| | | | | | | | | | | | | | | | | Accumulated | | Property | | | | | | |
| |||
| | Common stock | | Additional | | | | | | | | | Other | | Trust, Inc. | | Non- | | | |
| ||||||||
| | | | Par | | Paid-in | | Treasury Stock | | Accumulated | | Comprehensive | | Stockholders’ | | Controlling | | Total |
| ||||||||||
|
| Shares |
| Value |
| Capital |
| Shares |
| Amount |
| Deficit |
| Income |
| Equity |
| Interests |
| Equity |
| ||||||||
Balance, December 31, 2019 |
| 287,380,891 | | $ | 2,874 | | $ | 5,132,532 | | 5,180,140 | | $ | (104,194) | | $ | (381,719) | | $ | 50,932 | | $ | 4,700,425 | | $ | 436,589 | | $ | 5,137,014 | |
Cumulative effect of credit loss accounting standard effective January 1, 2020 | | — | | | — | | | — | | — | | | — | | | (32,286) | | | — | | | (32,286) | | | — | | | (32,286) | |
Proceeds from DRIP Plan | | 25,031 | | | — | | | 369 | | — | | | — | | | — | | | — | | | 369 | | | — | | | 369 | |
Redemption of Class A Units for common stock | | 409,712 | | | 4 | | | 8,534 | | — | | | — | | | — | | | — | | | 8,538 | | | (8,538) | | | — | |
Equity offering costs | | — | | | — | | | (15) | | — | | | — | | | — | | | — | | | (15) | | | — | | | (15) | |
Common stock repurchased | | — | | | — | | | — | | 1,925,421 | | | (28,830) | | | — | | | — | | | (28,830) | | | — | | | (28,830) | |
Share-based compensation | | 1,336,217 | | | 14 | | | 16,130 | | — | | | — | | | — | | | — | | | 16,144 | | | — | | | 16,144 | |
Manager fees paid in stock |
| 2,421,232 | | | 24 | | | 36,022 | | — | | | — | | | — | | | — | | | 36,046 | | | — | | | 36,046 | |
Net income |
| — | | | — | | | — | | — | | | — | | | 72,887 | | | — | | | 72,887 | | | 13,805 | | | 86,692 | |
Dividends declared, $0.96 per share |
| — | | | — | | | — | | — | | | — | | | (272,975) | | | — | | | (272,975) | | | — | | | (272,975) | |
Other comprehensive loss, net |
| — | | | — | | | — | | — | | | — | | | — | | | (8,066) | | | (8,066) | | | — | | | (8,066) | |
VIE non-controlling interests | | — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,189) | | | (2,189) | |
Contributions from non-controlling interests | | — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 9,406 | | | 9,406 | |
Distributions to non-controlling interests |
| — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (76,514) | | | (76,514) | |
Balance, June 30, 2020 |
| 291,573,083 | | $ | 2,916 | | $ | 5,193,572 |
| 7,105,561 | | $ | (133,024) | | $ | (614,093) | | $ | 42,866 | | $ | 4,492,237 | | $ | 372,559 | | $ | 4,864,796 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 |
| 280,839,692 | | $ | 2,808 | | $ | 4,995,156 | | 5,180,140 | | $ | (104,194) | | $ | (348,998) | | $ | 58,660 | | $ | 4,603,432 | | $ | 296,757 | | $ | 4,900,189 | |
Proceeds from DRIP Plan | | 17,136 | | | — | | | 379 | | — | | | — | | | — | | | — | | | 379 | | | — | | | 379 | |
Redemption of Class A Units for common stock | | 754,345 | | | 8 | | | 16,365 | | — | | | — | | | — | | | — | | | 16,373 | | | (16,373) | | | — | |
Equity offering costs | | — | | | — | | | (8) | | — | | | — | | | — | | | — | | | (8) | | | — | | | (8) | |
Conversion of 2019 Convertible Notes | | 3,611,918 | | | 36 | | | 67,526 | | — | | | — | | | — | | | — | | | 67,562 | | | — | | | 67,562 | |
Share-based compensation |
| 732,907 | | | 7 | | | 13,381 | | — | | | — | | | — | | | — | | | 13,388 | | | — | |
| 13,388 | |
Manager incentive fee paid in stock |
| 495,363 | | | 5 | | | 10,972 | | — | | | — | | | — | | | — | | | 10,977 | | | — | |
| 10,977 | |
Net income |
| — | | | — | | | — | | — | | | — | | | 197,399 | | | — | | | 197,399 | | | 11,555 | |
| 208,954 | |
Dividends declared, $0.96 per share |
| — | | | — | | | — | | — | | | — | | | (270,259) | | | — | | | (270,259) | | | — | |
| (270,259) | |
Other comprehensive loss, net |
| — | | | — | | | — | | — | | | — | | | — | | | (1,536) | | | (1,536) | | | — | |
| (1,536) | |
VIE non-controlling interests |
| — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (177) | | | (177) | |
Contributions from non-controlling interests |
| — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 4,636 | | | 4,636 | |
Distributions to non-controlling interests |
| — | | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (30,854) | |
| (30,854) | |
Balance, June 30, 2019 |
| 286,451,361 | | $ | 2,864 | | $ | 5,103,771 |
| 5,180,140 | | $ | (104,194) | | $ | (421,858) | | $ | 57,124 | | $ | 4,637,707 | | $ | 265,544 | | $ | 4,903,251 | |
See notes to condensed consolidated financial statements.
7
9
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, amounts in thousands)
|
|
|
|
|
|
|
|
| For the Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
Net income |
| $ | 318,886 |
| $ | 244,930 |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
Amortization of deferred financing costs, premiums and discounts on secured financing agreements and secured borrowings on transferred loans |
|
| 14,131 |
|
| 12,061 |
Amortization of discounts and deferred financing costs on senior notes |
|
| 17,514 |
|
| 16,058 |
Accretion of net discount on investment securities |
|
| (11,669) |
|
| (11,967) |
Accretion of net deferred loan fees and discounts |
|
| (27,014) |
|
| (38,809) |
Share-based compensation |
|
| 13,290 |
|
| 22,797 |
Share-based component of incentive fees |
|
| 14,410 |
|
| 14,657 |
Change in fair value of fair value option investment securities |
|
| 4,061 |
|
| 714 |
Change in fair value of consolidated VIEs |
|
| (59,160) |
|
| 42,371 |
Change in fair value of servicing rights |
|
| 21,301 |
|
| 33,213 |
Change in fair value of loans held-for-sale |
|
| (45,484) |
|
| (70,122) |
Change in fair value of derivatives |
|
| 62,463 |
|
| 3,360 |
Foreign currency (gain) loss, net |
|
| (28,211) |
|
| 20,367 |
Gain on sale of investments and other assets |
|
| (17,004) |
|
| (165) |
Impairment charges |
|
| 1,099 |
|
| 711 |
Loan loss allowance, net |
|
| (3,170) |
|
| 3,395 |
Depreciation and amortization |
|
| 64,937 |
|
| 49,081 |
Earnings from unconsolidated entities |
|
| (27,763) |
|
| (12,849) |
Distributions of earnings from unconsolidated entities |
|
| 4,716 |
|
| 15,151 |
Bargain purchase gain |
|
| — |
|
| (8,406) |
Loss on extinguishment of debt |
|
| 5,916 |
|
| — |
Origination and purchase of loans held-for-sale, net of principal collections |
|
| (1,487,813) |
|
| (1,186,080) |
Proceeds from sale of loans held-for-sale |
|
| 987,828 |
|
| 1,123,512 |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Related-party payable, net |
|
| (7,829) |
|
| (17,166) |
Accrued and capitalized interest receivable, less purchased interest |
|
| (63,032) |
|
| (58,275) |
Other assets |
|
| (12,198) |
|
| 6,168 |
Accounts payable, accrued expenses and other liabilities |
|
| 37,367 |
|
| (3,537) |
Net cash (used in) provided by operating activities |
|
| (222,428) |
|
| 201,170 |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
Origination and purchase of loans held-for-investment |
|
| (2,195,258) |
|
| (1,583,628) |
Proceeds from principal collections on loans |
|
| 1,670,159 |
|
| 2,187,844 |
Proceeds from loans sold |
|
| 37,079 |
|
| 236,433 |
Purchase of investment securities |
|
| (69,231) |
|
| (359,510) |
Proceeds from sales of investment securities |
|
| 11,134 |
|
| 3,799 |
Proceeds from principal collections on investment securities |
|
| 209,903 |
|
| 70,316 |
Real estate business combinations, net of cash and restricted cash acquired |
|
| (18,194) |
|
| (91,186) |
Proceeds from sale of properties |
|
| 44,219 |
|
| — |
Purchases and additions to properties and other assets |
|
| (564,755) |
|
| (10,209) |
Investment in unconsolidated entities |
|
| (20,544) |
|
| (3,870) |
Distribution of capital from unconsolidated entities |
|
| 3,858 |
|
| 15,026 |
Payments for purchase or termination of derivatives |
|
| (41,208) |
|
| (24,954) |
Proceeds from termination of derivatives |
|
| 23,686 |
|
| 37,652 |
Return of investment basis in purchased derivative asset |
|
| 151 |
|
| 206 |
Net cash (used in) provided by investing activities |
|
| (909,001) |
|
| 477,919 |
| | | | | | |
| | For the Six Months Ended | ||||
| | June 30, | ||||
|
| 2020 |
| 2019 | ||
Cash Flows from Operating Activities: | | | | | | |
Net income | | $ | 86,692 | | $ | 208,954 |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | |
Amortization of deferred financing costs, premiums and discounts on secured borrowings | |
| 19,552 | |
| 17,439 |
Amortization of discounts and deferred financing costs on unsecured senior notes | |
| 3,938 | |
| 3,849 |
Accretion of net discount on investment securities | |
| (6,123) | |
| (7,857) |
Accretion of net deferred loan fees and discounts | |
| (20,840) | |
| (16,112) |
Share-based compensation | |
| 16,144 | |
| 13,388 |
Manager fees paid in stock | |
| 36,046 | |
| 10,977 |
Change in fair value of investment securities | |
| (3,331) | |
| (729) |
Change in fair value of consolidated VIEs | |
| 62,175 | |
| (11,957) |
Change in fair value of servicing rights | |
| 2,962 | |
| 1,683 |
Change in fair value of loans | |
| (18,316) | |
| (33,157) |
Change in fair value of derivatives | |
| 10,531 | |
| 4,496 |
Foreign currency loss, net | |
| 27,313 | |
| 1,470 |
Gain on sale of investments and other assets | |
| (6,768) | |
| (7,000) |
Impairment charges on properties and related intangibles | |
| — | |
| 1,392 |
Credit loss provision, net | |
| 58,871 | |
| 3,281 |
Depreciation and amortization | |
| 47,137 | |
| 57,416 |
(Earnings) loss from unconsolidated entities | |
| (28,873) | |
| 34,383 |
Distributions of earnings from unconsolidated entities | |
| 888 | |
| 8,056 |
Loss on extinguishment of debt | | | 2,377 | | | 6,114 |
Origination and purchase of loans held-for-sale, net of principal collections | |
| (740,649) | |
| (1,600,100) |
Proceeds from sale of loans held-for-sale | |
| 1,340,833 | |
| 928,747 |
Changes in operating assets and liabilities: | | | | | | |
Related-party payable, net | |
| (19,984) | |
| (22,899) |
Accrued and capitalized interest receivable, less purchased interest | |
| (80,702) | |
| (54,261) |
Other assets | |
| (16,372) | |
| (18,270) |
Accounts payable, accrued expenses and other liabilities | |
| (3,763) | |
| (12,153) |
Net cash provided by (used in) operating activities | |
| 769,738 | |
| (482,850) |
Cash Flows from Investing Activities: | | | | | | |
Origination and purchase of loans held-for-investment | |
| (1,666,903) | |
| (2,051,646) |
Proceeds from principal collections on loans | |
| 999,254 | |
| 1,342,698 |
Proceeds from loans sold | |
| 435,097 | |
| 843,344 |
Purchase and funding of investment securities | |
| (16,120) | |
| — |
Proceeds from sales of investment securities | |
| 7,940 | |
| 3,978 |
Proceeds from principal collections on investment securities | |
| 50,479 | |
| 73,035 |
Proceeds from sales of real estate | |
| 23,805 | |
| 1,841 |
Purchases and additions to properties and other assets | | | (13,914) | | | (10,425) |
Investment in unconsolidated entities | | | (3,130) | | | (785) |
Proceeds from sale of interest in unconsolidated entities | | | 10,313 | | | — |
Distribution of capital from unconsolidated entities | |
| 206 | |
| 10,041 |
Payments for purchase or termination of derivatives | |
| (80,911) | |
| (20,212) |
Proceeds from termination of derivatives | |
| 13,128 | |
| 8,899 |
Net cash (used in) provided by investing activities | |
| (240,756) | |
| 200,768 |
See notes to condensed consolidated financial statements.
8
10
Starwood Property Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited, amounts in thousands)
|
|
|
|
|
|
|
|
| For the Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Cash Flows from Financing Activities: |
|
|
|
|
|
|
Proceeds from borrowings |
| $ | 4,090,163 |
| $ | 3,158,920 |
Principal repayments on and repurchases of borrowings |
|
| (2,724,179) |
|
| (3,138,534) |
Payment of deferred financing costs |
|
| (17,038) |
|
| (17,799) |
Proceeds from common stock issuances |
|
| 541 |
|
| 299 |
Payment of equity offering costs |
|
| (647) |
|
| — |
Payment of dividends |
|
| (376,061) |
|
| (343,670) |
Contributions from non-controlling interests |
|
| 105 |
|
| 10,417 |
Distributions to non-controlling interests |
|
| (7,519) |
|
| (5,400) |
Purchase of treasury stock |
|
| — |
|
| (19,723) |
Issuance of debt of consolidated VIEs |
|
| 11,657 |
|
| 596 |
Repayment of debt of consolidated VIEs |
|
| (92,383) |
|
| (202,892) |
Distributions of cash from consolidated VIEs |
|
| 62,797 |
|
| 40,731 |
Net cash provided by (used in) financing activities |
|
| 947,436 |
|
| (517,055) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
| (183,993) |
|
| 162,034 |
Cash, cash equivalents and restricted cash, beginning of period |
|
| 650,755 |
|
| 391,884 |
Effect of exchange rate changes on cash |
|
| 1,674 |
|
| (626) |
Cash, cash equivalents and restricted cash, end of period |
| $ | 468,436 |
| $ | 553,292 |
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
Cash paid for interest |
| $ | 177,604 |
| $ | 146,011 |
Income taxes paid |
|
| 7,722 |
|
| 3,038 |
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
|
|
Dividends declared, but not yet paid |
| $ | 125,638 |
| $ | 115,190 |
Consolidation of VIEs (VIE asset/liability additions) |
|
| 2,092,516 |
|
| 19,118,645 |
Deconsolidation of VIEs (VIE asset/liability reductions) |
|
| 2,244,267 |
|
| 5,404,305 |
Net assets acquired from consolidated VIEs |
|
| 19,652 |
|
| 133,177 |
Fair value of assets acquired, net of cash and restricted cash |
|
| 18,956 |
|
| 270,021 |
Fair value of liabilities assumed |
|
| 762 |
|
| 170,429 |
Unsettled investment securities sold |
|
| — |
|
| 14,926 |
| | | | | | |
| | For the Six Months Ended | ||||
| | June 30, | ||||
|
| 2020 |
| 2019 | ||
Cash Flows from Financing Activities: | | | | | | |
Proceeds from borrowings | | $ | 3,686,932 | | $ | 3,271,785 |
Principal repayments on and repurchases of borrowings | |
| (3,716,558) | |
| (2,679,056) |
Payment of deferred financing costs | |
| (7,564) | |
| (18,388) |
Proceeds from common stock issuances | |
| 369 | |
| 379 |
Payment of equity offering costs | | | (15) | | | (8) |
Payment of dividends | |
| (271,624) | |
| (267,301) |
Contributions from non-controlling interests | | | 9,406 | | | 4,636 |
Distributions to non-controlling interests | |
| (76,514) | |
| (30,854) |
Purchase of treasury stock | |
| (28,830) | |
| — |
Issuance of debt of consolidated VIEs | |
| 24,376 | |
| 100,224 |
Repayment of debt of consolidated VIEs | |
| (236,336) | |
| (91,808) |
Distributions of cash from consolidated VIEs | |
| 36,989 | |
| 21,411 |
Net cash (used in) provided by financing activities | |
| (579,369) | |
| 311,020 |
Net (decrease) increase in cash, cash equivalents and restricted cash | |
| (50,387) | |
| 28,938 |
Cash, cash equivalents and restricted cash, beginning of period | |
| 574,031 | |
| 487,865 |
Effect of exchange rate changes on cash | |
| 487 | |
| (605) |
Cash, cash equivalents and restricted cash, end of period | | $ | 524,131 | | $ | 516,198 |
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest | | $ | 202,648 | | $ | 252,392 |
Income taxes paid | |
| 657 | |
| 7,270 |
Supplemental disclosure of non-cash investing and financing activities: | | | | | | |
Dividends declared, but not yet paid | | $ | 137,242 | | $ | 135,615 |
Consolidation of VIEs (VIE asset/liability additions) | |
| 3,077,357 | |
| 4,104,135 |
Deconsolidation of VIEs (VIE asset/liability reductions) | |
| — | |
| 303,827 |
Reclassification of residential loans held-for-investment to held-for-sale | | | 422,691 | | | — |
Loan principal collections temporarily held at master servicer | | | 12,274 | | | — |
Redemption of Class A Units for common stock | | | 8,538 | | | 16,373 |
Settlement of 2019 Convertible Notes in shares | | | — | | | 75,525 |
Settlement of loans transferred as secured borrowings | | | — | | | 74,692 |
Net assets acquired through foreclosure | | | — | | | 27,416 |
Lease liabilities arising from obtaining right-of-use assets | | | — | | | 7,092 |
See notes to condensed consolidated financial statements.
911
Starwood Property Trust, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
As of SeptemberJune 30, 20172020
(Unaudited)
1. Business and Organization
Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering. We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate investments in both the United States (“U.S.”) and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.
We have three4 reportable business segments as of SeptemberJune 30, 2017:2020 and we refer to the investments within these segments as our target assets:
| Real estate commercial and residential lending (the |
| 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 |
| Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing business in the U.S. that manages and works out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts. |
Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).
We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of our taxable income to our stockholders by prescribed dates and comply with various other requirements.
We are organized as a holding company and conduct our business primarily through our various wholly-owned subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms of a management agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded and controlled by Mr. Sternlicht.
10
12
2. Summary of Significant Accounting Policies
Balance Sheet Presentation of the Investing and Servicing Segment’sSecuritization Variable Interest Entities
As noted above, the Investing and Servicing Segment operates anWe operate investment businessbusinesses that acquiresacquire unrated, investment grade and non-investment grade rated CMBS.CMBS and RMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. Under accounting principles generally accepted in the United States of America (“GAAP”), SPEs typically qualify as VIEs. These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.
Because the Investing and Servicing Segmentwe often servesserve as the special servicer or servicing administrator of the trusts in which it invests,we invest, or we have the ability to remove and replace the special servicer without cause, consolidation of these structures is required pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator of these VIEs.
The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, an allocable portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.
Refer to the segment data in Note 22 for a presentation of the Investing and Servicing Segmentour business segments without consolidation of these VIEs.
Basis of Accounting and Principles of Consolidation
The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the2019 (our “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the operating results for the full year.
Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, or (iii) became significant since December 31, 20162019 due to a corporate action or increase in the significance of the underlying business activity.activity or (iv) changed upon adoption of an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”).
Variable Interest Entities
In addition to the Investing and Servicing Segment’ssecuritization VIEs, we have financed a pool of our loans through a collateralized loan obligation (“CLO”) which is considered a VIE. We also hold interests in certain other entities in which we hold interests are considered VIEs as the limited partners of thesethose entities with equity at risk do not collectively possess (i) the right to remove the general partner or dissolve the partnership without cause or (ii) the right to participate in significant decisions made by the partnership.
11
13
We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Accounting Standards Codification (“ASC”) 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. We consider our variable interests as well as any variable interests of our related parties in making this determination. Where both of these factors are present, we are deemed to be the primary beneficiary and we consolidate the VIE. Where either one of these factors is not present, we are not the primary beneficiary and do not consolidate the VIE.
To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes,includes: (i) identifying the activities that most significantly impact the VIE’s economic performance; and (ii) identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE. The right to remove the decision maker in a VIE must be exercisable without cause for the decision maker to not be deemed the party that has the power to direct the activities of a VIE.
To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity investments, servicing fees and other arrangements deemed to be variable interests in the VIE. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.
Our purchased investment securities include CMBS which are unrated and non-investment grade rated securities issued by CMBSsecuritization trusts. In certain cases, we may contract to provide special servicing activities for these CMBS trusts, or, as holder of the controlling class, we may have the right to name and remove the special servicer for these trusts. In our role as special servicer, we provide services on defaulted loans within the trusts, such as foreclosure or work-out procedures, as permitted by the underlying contractual agreements. In exchange for these services, we receive a fee. These rights give us the ability to direct activities that could significantly impact the trust’s economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove us as special servicer without cause, we do not have the power to direct activities that most significantly impact the trust’s economic performance. We evaluated all of our positions in such investments for consolidation.
For securitization VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, an allocable portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding allocable amortization or change in fair value of the servicing intangible asset, are also eliminated in consolidation.
We perform ongoing reassessments of: (i) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework, and (ii) whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion regarding the VIE to change.
We elect the fair value option for initial and subsequent recognition of the assets and liabilities of our consolidated securitization VIEs. Interest income and interest expense associated with these VIEs are no longer relevant on a standalone basis because these amounts are already reflected in the fair value changes. We have elected to present these items in a single line on our condensed consolidated statements of operations. The residual difference shown on
12
our condensed consolidated statements of operations in the line item “Change in net assets related to consolidated VIEs” represents our beneficial interest in the VIEs.
14
We separately present the assets and liabilities of our consolidated securitization VIEs as individual line items on our condensed consolidated balance sheets. The liabilities of our consolidated securitization VIEs consist solely of obligations to the bondholders of the related CMBS trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our consolidated securitization VIEs consist principally of loans, but at times, also include foreclosed loans which have been temporarily converted into real estate owned (“REO”). These assets in the aggregate are likewise presented as a single line item entitled “VIE assets.”
Loans comprise the vast majority of our securitization VIE assets and are carried at fair value due to the election of the fair value option. When an asset becomes REO, it is due to nonperformancenon-performance of the loan. Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value. Furthermore, when we consolidate a CMBS trust, any existing REO would be consolidated at fair value. Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.
In addition to sharing a similar measurement method as the loans in a CMBS trust, the securitization VIE assets as a whole can only be used to settle the obligations of the consolidated VIE. The assets of our securitization VIEs are not individually accessible by the bondholders, which creates inherent limitations from a valuation perspective. Also creating limitations from a valuation perspective is our role as special servicer, which provides us very limited visibility, if any, into the performing loans of a CMBS trust.
REO assets generally represent a very small percentage of the overall asset pool of a CMBS trust. In a new issue CMBS trusttrusts there are no REO assets. We estimate that REO assets constitute approximately 4%1% of our consolidated securitization VIE assets, with the remaining 96%99% representing loans. However, it is important to note that the fair value of our securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under Accounting Standards Update (“ASU”)ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.
Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as opposed to its fair value. However, as a pool, the fair value of the assets in total is equal to the fair value of the liabilities.
For these reasons, the assets of our securitization VIEs are presented in the aggregate.
Fair Value Option
The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.
We have elected the fair value option for certain eligible financial assets and liabilities of our consolidated securitization VIEs, residential loans held-for-investment, loans held-for-sale originated or acquired for future securitization and purchased CMBS issued by VIEs we could consolidate in the future and certain investments in marketable equity securities.future. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for
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residential mortgage loans held-for-investment were made in order to maintain consistency across all our residential mortgage loans. The fair value elections for mortgage loans held-for-sale were made due to the expected short-term natureholding period of these instruments. The fair value elections for investments in marketable equity securities were made because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market.
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Fair Value Measurements
We measure our mortgage‑backedmortgage-backed securities, derivative assets and liabilities, domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.
As discussed above, we measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static”; that is, no0 reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the securitization VIE,VIEs, we maximize the use of observable inputs over unobservable inputs. We also acknowledge that our principal market for selling CMBS assets is the securitization market where the market participant is considered to be a CMBS trust or a collateralized debt obligation (“CDO”). This methodology results in the fair value of the assets of a static CMBS trust being equal to the fair value of its liabilities. Refer to Note 19 for further discussion regarding our fair value measurements.
Business Combinations
Under ASC 805, Business Combinations, the acquirer in a business combination must recognize, with certain exceptions, the fair values of assets acquired, liabilities assumed, and non-controlling interests when the acquisition constitutes a change in control of the acquired entity. As goodwill is calculated as a residual, all goodwill of the acquired business, not just the acquirer’s share, is recognized under this “full goodwill” approach.
We apply the business combination provisions of ASC 805 in accounting for most acquisitions of real estate assets with in-place leases. In doing so, we record provisional amounts for certain items as of the date of acquisition. During the measurement period, a period which shall not exceed one year, we prospectively adjust the provisional amounts recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized. We do not apply the business combination provisions of ASC 805 for acquired real estate assets where a lease is entered into concurrently with the acquisition of the asset, such as in sale leaseback transactions. We account for sale leaseback transactions as asset acquisitions.
Lease Classification
In accordance with ASC 840, Leases, we evaluate all new or amended leases to determine if the lease (1) provides for a transfer of ownership to the lessee at the conclusion of the lease, (2) provides the lessee with a bargain purchase option, (3) has a term of 75% or more of the leased asset’s remaining useful life, or (4) has minimum lease payments with a present value of 90% or more of the leased asset’s fair value. If any of these conditions exist, we account for the lease as a capital lease, otherwise, the lease is considered an operating lease.
Loans Held-for-Investment and Provision for Loan Losses
Loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination costs as applicable, unless the loans are deemed impaired. credit deteriorated or we have elected to apply the fair value option at purchase.
Loans Held-For-Sale
Our loans that we intend to sell or liquidate in the short-term are classified as held-for-sale and are carried at the lower of amortized cost or fair value, unless we have elected to apply the fair value option at origination or purchase.
Credit Losses
Loans and Debt Securities Measured at Amortized Cost
ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our loans held-for-investment (“HFI”) and our held-to-maturity (“HTM”) debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities. However, as permitted by ASC 326, we have elected not to measure an allowance for credit losses on accrued interest receivable (which is classified separately on our condensed consolidated balance sheet), but rather write off in a timely manner and/or cease accruing interest that would likely be uncollectible. Our adoption of the CECL model resulted in a $32.3 million increase to our total allowance for credit losses, which was recognized as a cumulative-effect adjustment to accumulated deficit as of January 1, 2020.
As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estateand infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. See Note 4 for further discussion of our methodologies.
We also evaluate each loan classified as held-for-investmentand security measured at amortized cost for impairmentcredit deterioration at least quarterly. In connection with this evaluation, we assess the performance of each loan and assign a risk rating based on several factors, including risk of loss, loan-to-collateral value ratio (“LTV”), collateral performance, structure, exit plan, and sponsorship. Loans are rated “1” through “5”, from less risk to greater risk, in connection with this review.
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ImpairmentCredit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.loan or security. If a loan or security is considered to be impaired,credit deteriorated, we record andepart from the industry loss rate approach described above and determine the credit loss allowance throughas any excess of the provision for loan losses to reduce the carrying valueamortized cost basis of the loan toor security over (i) the present value of expected future cash flows discounted at the loan’s contractual effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral. Actual
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Available-for-Sale Debt Securities
Separate provisions of ASC 326 apply to our available-for-sale (“AFS”) debt securities, which are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (“AOCI”). We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration (“PCD”) by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis. As of the January 1, 2020 effective date, no such credit loss allowance gross-up was required on our AFS debt securities with PCD due to their individual unrealized gain positions as of that date.
Subsequently, cumulative adverse changes in expected cash flows on our AFS debt securities are recognized currently as an increase to the allowance for credit losses. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.
Goodwill
ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, became effective for the Company on January 1, 2020. This ASU specifies that goodwill impairment be measured as the excess of the reporting unit’s carrying value (inclusive of goodwill) over its fair value, eliminating the requirement that all assets and liabilities of the reporting unit be remeasured individually in connection with measurement of goodwill impairment.
Revenue Recognition
Interest Income
Interest income on performing loans and financial instruments is accrued based on the outstanding principal amount and contractual terms of the instrument. For loans where we do not elect the fair value option, origination fees and direct loan origination costs are also recognized in interest income over the loan term as a yield adjustment using the effective interest method. When we elect the fair value option, origination fees and direct loan costs are recorded directly in income and are not deferred. Discounts or premiums associated with the purchase of non-performing loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on expected cash flows through the expected maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections.
We cease accruing interest on non-performing loans at the earlier of (i) the loan becoming significantly past due or (ii) management concluding that a full recovery of all interest and principal is doubtful. Interest income on non-accrual loans in which management expects a full recovery of the loan’s outstanding principal balance is only recognized when received in cash. If a full recovery of principal is doubtful, the cost recovery method is applied whereby any cash received is applied to the outstanding principal balance of the loan. A non-accrual loan is returned to accrual status at such time as the loan becomes contractually current and management believes all future principal and interest will be received according to the contractual loan terms.
For loans acquired with deteriorated credit quality, interest income is only recognized to the extent that our estimate of undiscounted expected principal and interest exceeds our investment in the loan. Accretable yield, if any, could ultimately differis recognized as interest income on a level-yield basis over the life of the loan.
Upon the sale of loans or securities which are not accounted for pursuant to the fair value option, the excess (or deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain (loss).
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Servicing Fees
We typically seek to be the special servicer on CMBS transactions in which we invest. When we are appointed to serve in this capacity, we earn special servicing fees from these estimates.the related activities performed, which consist primarily of overseeing the workout of under-performing and non-performing loans underlying the CMBS transactions. These fees are recognized in income in the period in which the services are performed and the revenue recognition criteria have been met.
Rental Income
Rental income is recognized when earned from tenants. For leases that provide rent concessions or fixed escalations over the lease term, rental income is recognized on a straight-line basis over the noncancelable term of the lease. In net lease arrangements, costs reimbursable from tenants are recognized in rental income in the period in which the related expenses are incurred as we are generally the primary obligor with respect to purchasing goods and services for property operations. In instances where the tenant is responsible for property maintenance and repairs and contracts and settles such costs directly with third party service providers, we do not reflect those expenses in our consolidated statement of operations as the tenant is the primary obligor.
Earnings Per Share
We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) shares contingently issuable to our Manager, and (iii) the “in-the-money” conversion options associated with our outstanding convertible senior notes (the “Convertible Notes”) (see further discussion in Notes 10 and 17) and (iv) non-controlling interests that are redeemable with our common stock (see Note 16). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.
Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities. In addition, the non-controlling interests that are redeemable with our common stock are considered participating securities because they earn a preferred return indexed to the dividend rate on our common stock (see Note 16). Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities. For the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the two-class method resulted in the most dilutive EPS calculation.
Restricted Cash
Restricted cash includes cash and cash equivalents that are legally or contractually restricted as to withdrawal or usage and primarily includes cash collateral associated with derivative financial instruments and funds held on behalf of borrowers and tenants. Effective January 1, 2017, we early adopted ASU 2016-18, Statement of Cash Flows (Topic 230) – Restricted Cash, which requires that restricted cash be included with cash and cash equivalents when reconciling the beginning and end-of-period total amounts shown on the statement of cash flows. As required by this ASU, we applied this change retrospectively to our prior period condensed consolidated statement of cash flows for the nine months ended September 30, 2016.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our loans, investment securities and intangible assets,investments, which has a significant impact on the amountsamount of interest income credit losses (if any), and fair values that we record and/or disclose. In addition, the fair value of financial assets and liabilities that are estimated using a discounted cash flows method is significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.
Reclassifications
Certain priorIn December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 200 countries and territories, including every state in the U.S and in cities and regions where our corporate headquarters and/or properties that secure our investments, or properties that we own, are located, 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 disruption 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 amounts have been reclassifiedof global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to conform to our current period presentation. In that regard, we have reclassified $0.7 millionthe ultimate adverse impact of impairmentCOVID-19 on economic and market conditions. We believe the estimates and assumptions underlying
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our consolidated financial statements are reasonable and supportable based on the information available as of operations forJune 30, 2020. However, uncertainty over the threeultimate impact COVID-19 will have on the global economy generally, and nine months ended Septemberour business in particular, makes any estimates and assumptions as of June 30, 2016.2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.
Recent Accounting Developments
On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts. At issuance, the ASU was effective for the first interim or annual period
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beginning after December 15, 2016. On AugustMarch 12, 2015,2020, the FASB issued ASU 2015-14, Revenue from Contracts with Customers2020-04, Reference Rate Reform (Topic 848) – DeferralFacilitation of the Effective Date,Effects of Reference Rate Reform on Financial Reporting,which delayed the effective dateprovides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of ASU 2014-09 by one year, resulting in the ASU becoming effective for the first interim or annual period beginning after December 15, 2017. We do not expect the application of this ASU to materially impact the Company as our material revenue sources are not within the scope of the ASU.
On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which impacts the accounting for equity investments, financial liabilities under the fair value option, and disclosure requirements for financial instruments. The ASU shall be applied prospectively and is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is not permitted. We do not expect the application of this ASU to materially impact the Company.
On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee. Lessor accounting was not significantly changed by the ASU. Thereference rate reform. This ASU is effective for annual periods, and interim periods therein, beginning afteras of March 12, 2020 through December 15, 2018 by applying a modified retrospective approach. Early application is permitted. We are in the process of assessing the impact this ASU will have on the Company.
On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) – Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance and illustrations in the FASB’s revenue recognition standard issued in ASU 2014-09.31, 2022. The ASU provides further guidance to assist an entity in determining whether the nature of its promise to its customer is to provide the underlying goods or services, meaning the entity is a principal, or to arrange for a third party to provide the underlying goods or services, meaning the entity is an agent. The ASU is effective for the first interim or annual period beginning after December 15, 2017. Early application is permitted though no earlier than the first interim or annual period beginning after December 15, 2016. We doCompany has not expect the application of this ASU to materially impact the Company.
On April 14, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) – Identifying Performance Obligations and Licensing, which amends guidance and illustrations in the FASB’s revenue recognition standard issued in ASU 2014-09 regarding the identification of performance obligations and the implementation guidance on licensing arrangements. The ASU is effective for the first interim or annual period beginning after December 15, 2017. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, which mandates use of an “expected loss” credit model for estimating future credit losses of certain financial instruments insteadadopted any of the “incurred loss” credit model that current GAAP requires. The “expected loss” model requiresoptional expedients or exceptions through June 30, 2020, but will continue to evaluate the considerationpossible adoption of possible credit losses overany such expedients or exceptions during the life of an instrumenteffective period as opposed to only estimating credit losses upon the occurrence of a discrete loss event in accordance with the current “incurred loss” methodology. The ASU is effective for annual reporting periods,circumstances evolve.
3. Acquisitions and interim periods therein, beginning after December 15, 2019. Early application is permitted though no earlier than the first interim or annual period beginning after December 15, 2018. Though we have not completed our assessment of this ASU, we expect the ASU to result in our recognition of higher levels of allowances for loan losses. Our assessment of the estimated amount of such increases remains in process.Divestitures
On August 26, 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments, which seeks to reduce diversity in practice regarding how various cash receipts and payments are reported within the statement of cash flows. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted in any interim or annual period. We do not expect the application of this ASU to materially impact the Company.
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On October 24, 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) – Intra-Entity Transfers of Assets Other Than Inventory, which requires that an entity recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time of the transfer instead of deferring the tax consequences until the asset has been sold to an outside party, as current GAAP requires. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted in any interim or annual period. We do not expect the application of this ASU to materially impact the Company.
On January 5, 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) – Clarifying the Definition of a Business, which amends the definition of a business to exclude acquisitions of groups of assets where substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017 and is applied prospectively. Early application is permitted. We expect that most real estate acquired by the Company subsequent to the ASU’s effective date will be accounted for as asset acquisitions.
On January 26, 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, which simplifies the method applied for measuring impairment in cases where goodwill is impaired. The ASU specifies that goodwill impairment will be measured as the excess of the reporting unit’s carrying value (inclusive of goodwill) over its fair value, eliminating the requirement that all assets and liabilities of the reporting unit be remeasured individually in connection with measurement of goodwill impairment. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2019 and is applied prospectively. Early application is permitted though no earlier than January 1, 2017. We do not expect the application of this ASU to materially impact the Company.
On February 22, 2017, the FASB issued ASU 2017-05, Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20), which clarifies what constitutes an in substance nonfinancial asset and changes the accounting for partial sales of nonfinancial assets to be more consistent with the accounting for a sale of a business. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.
On August 28, 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance regarding the designation and measurement of designated hedging relationships. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.
3. Acquisitions and Dispositions
Master Lease Portfolio
On September 25, 2017, we acquired 20 retail properties and three industrial properties (the “Master Lease Portfolio”) for a purchase price of $553.3 million, inclusive of $3.7 million of related transaction costs. Concurrently with the acquisition, we leased the properties back to the seller under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations. These properties, which collectively comprise 5.3 million square feet, are geographically dispersed throughout the U.S., with more than 50% of the portfolio, by carrying value, located in Utah, Florida, Texas and Minnesota. We utilized $265.9 million in new financing in order to fund the acquisition (as set forth in Note 9). The acquisition was accounted for as an asset acquisition.
Investing and Servicing Segment Property Portfolio
During the three and ninesix months ended SeptemberJune 30, 2017, our Investing and Servicing Segment acquired the net equity of one and two commercial real estate properties from CMBS trusts, respectively, for $18.2 million and $37.2 million, respectively. These properties, aggregated with the controlling interests in 24 commercial real estate properties acquired from CMBS trusts during the years ended December 31, 2015 and 2016 for an aggregate acquisition price of $268.5 million, comprise the Investing and Servicing Segment Property Portfolio (the “REIS Equity Portfolio”). When
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the properties are acquired from CMBS trusts that are consolidated as VIEs on our balance sheet, the acquisitions are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.
We applied the business combination provisions of ASC 805, Business Combinations, in accounting for the REIS Equity Portfolio acquisitions. No goodwill was recognized in connection with the REIS Equity Portfolio acquisitions as the purchase prices did not exceed the fair values of the net assets acquired. A bargain purchase gain of $0.6 million was recognized within change in net assets related to consolidated VIEs in our condensed consolidated statement of operations for the nine months ended September 30, 2017 and $8.8 million for the year ended December 31, 2016 as the fair value of the net assets acquired for certain properties exceeded the purchase price.
During the nine months ended September 30, 2017, in accordance with ASU 2015-16, Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments, we adjusted our initial provisional estimates of the acquisition date fair values of the identified assets acquired and liabilities assumed for a certain property acquired within the REIS Equity Portfolio during the year ended December 31, 2016 to reflect new information obtained regarding facts and circumstances that existed at the acquisition date. The following table summarizes the measurement period adjustment applied to the initial provisional acquisition date balance sheet (amounts in thousands):
|
|
|
|
|
|
|
|
|
| 2016 Acquisition Adjustment | |||||||
|
|
| Measurement |
|
| |||
| Initial |
| Period |
| Adjusted | |||
Assets acquired: | Amounts |
| Adjustment |
| Amounts | |||
Properties | $ | 12,087 |
| $ | 660 |
| $ | 12,747 |
Intangible assets |
| 4,270 |
|
| (802) |
|
| 3,468 |
Other assets |
| 97 |
|
| — |
|
| 97 |
Total assets acquired |
| 16,454 |
|
| (142) |
|
| 16,312 |
Liabilities assumed: |
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
| 1,539 |
|
| (142) |
|
| 1,397 |
Total liabilities assumed |
| 1,539 |
|
| (142) |
|
| 1,397 |
Non-controlling interests |
| 3,084 |
|
| — |
|
| 3,084 |
Net assets acquired | $ | 11,831 |
| $ | — |
| $ | 11,831 |
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The net income effect associated with the measurement period adjustment during the nine months ended September 30, 2017 was immaterial.
During the three and nine months ended September 30, 2017,2020, we sold two and four propertiesa property within the Investing and Servicing Segment for $26.0$24.1 million. In connection with this sale, we recognized a gain of $7.4 million and $40.7 million, respectively, recognizing gain on sale of $11.2 million and $16.3 million, respectively, within gain on sale of investments and other assets in our condensed consolidated statements of operations. During bothThere were 0 Investing and Servicing Segment properties sold during the three and ninesix months ended SeptemberJune 30, 2017, $2.4 million of such gains were attributable to non-controlling interests.2019.
Medical Office Portfolio
The Medical Office Portfolio is comprised of 34 medical office buildings acquired for a purchase price of $758.8 million during the year ended December 31, 2016. These properties, which collectively comprise 1.9 million square feet, are geographically dispersed throughout the U.S. and primarily affiliated with major hospitals or located on or adjacent to major hospital campuses. No goodwill or bargain purchase gains were recognized in connection with the Medical Office Portfolio acquisition as the purchase price equaled the fair value of the net assets acquired.
Woodstar Portfolio
The Woodstar Portfolio is comprised of 32 affordable housing communities with 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas. During the year ended December 31, 2015, we acquired 18 of the 32 affordable housing communities of the Woodstar Portfolio with the final 14 communities acquired during the year ended December 31, 2016 for an aggregate acquisition price of $421.5 million. We assumed federal, state and county sponsored financing and other debt in connection with this acquisition.
No goodwill was recognized in connection with the Woodstar Portfolio acquisition as the purchase price did not exceed the fair value of the net assets acquired. A bargain purchase gain of $8.4 million was recognized within other income, net in our consolidated statement of operations for the year ended December 31, 2016 as the fair value of the net assets acquired exceeded the purchase price due to favorable changes in net asset fair values occurring between the date the purchase price was negotiated and the closing date.
Ireland Portfolio
The Ireland Portfolio was initially comprised of 12 net leased fully occupied office properties and one multi-family property all located in Dublin, Ireland, which the Company acquired during the year ended December 31, 2015. The Ireland Portfolio, which collectively is comprised of approximately 600,000 square feet, included total assets of $518.2 million and assumed debt of $283.0 million at acquisition. Following our acquisition, all assumed debt was immediately extinguished and replaced with new financing of $328.6 million from the Ireland Portfolio Mortgage (as set forth in Note 9). No goodwill or bargain purchase gain was recognized in connection with the Ireland Portfolio acquisition as the purchase price equaled the fair value of the net assets acquired.
During the nine months ended September 30, 2017, we sold one office property within the Ireland Portfolio for $3.9 million, recognizing an immaterial gain on sale within gain on sale of investments and other assets in our condensed consolidated statement of operations.
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Purchase Price Allocations of Business Combinations
We applied the business combination provisions of ASC 805, Business Combinations, in accounting for the 2017 REIS Equity Portfolio acquisitions. In doing so, we have recorded all identifiable assets acquired and liabilities assumed as of the acquisition date. These amounts are provisional and may be adjusted during the measurement period, which expires no later than one year from the acquisition date, if new information is obtained that, if known, would have affected the amounts recognized as of the acquisition date.
The following table summarizes the identified assets acquired and liabilities assumed as of the acquisition date (amounts in thousands):
|
|
|
|
|
| 2017 | |
|
| REIS Equity | |
Assets acquired: |
| Portfolio | |
Properties |
| $ | 34,902 |
Intangible assets |
|
| 4,272 |
Other assets |
|
| 1 |
Total assets acquired |
|
| 39,175 |
Liabilities assumed: |
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
| 1,329 |
Total liabilities assumed |
|
| 1,329 |
Net assets acquired |
| $ | 37,846 |
Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option.option for either. The following tables summarize our investments in mortgages and loans by subordination class as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
| Weighted |
| Average Life |
|
| Carrying |
| Face |
| Average |
| (“WAL”) | ||
September 30, 2017 |
| Value |
| Amount |
| Coupon |
| (years)(1) | ||
First mortgages (2) |
| $ | 5,527,219 |
| $ | 5,549,909 |
| 6.1 | % | 2.4 |
Subordinated mortgages (3) |
|
| 222,990 |
|
| 224,088 |
| 10.3 | % | 2.1 |
Mezzanine loans (2) |
|
| 615,562 |
|
| 615,724 |
| 10.6 | % | 1.2 |
Other |
|
| 23,218 |
|
| 27,073 |
| 8.4 | % | 4.3 |
Total loans held-for-investment |
|
| 6,388,989 |
|
| 6,416,794 |
|
|
|
|
Loans held-for-sale, fair value option |
|
| 608,624 |
|
| 601,051 |
| 5.6 | % | 7.6 |
Loans transferred as secured borrowings |
|
| 74,339 |
|
| 75,000 |
| 5.8 | % | 2.5 |
Total gross loans |
|
| 7,071,952 |
|
| 7,092,845 |
|
|
|
|
Loan loss allowance (loans held-for-investment) |
|
| (6,618) |
|
| — |
|
|
|
|
Total net loans |
| $ | 7,065,334 |
| $ | 7,092,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
First mortgages (2) |
| $ | 4,865,994 |
| $ | 4,881,656 |
| 5.7 | % | 2.2 |
Subordinated mortgages (3) |
|
| 278,032 |
|
| 293,925 |
| 8.9 | % | 3.3 |
Mezzanine loans (2) |
|
| 713,757 |
|
| 714,608 |
| 9.6 | % | 1.8 |
Total loans held-for-investment |
|
| 5,857,783 |
|
| 5,890,189 |
|
|
|
|
Loans held-for-sale, fair value option |
|
| 63,279 |
|
| 63,065 |
| 5.3 | % | 10.0 |
Loans transferred as secured borrowings |
|
| 35,000 |
|
| 35,000 |
| 6.2 | % | 0.4 |
Total gross loans |
|
| 5,956,062 |
|
| 5,988,254 |
|
|
|
|
Loan loss allowance (loans held-for-investment) |
|
| (9,788) |
|
| — |
|
|
|
|
Total net loans |
| $ | 5,946,274 |
| $ | 5,988,254 |
|
|
|
|
| | | | | | | | | | |
|
| | |
| | |
| |
| Weighted |
| | | | | | | | Weighted | | Average Life |
| | Carrying | | Face | | Average | | (“WAL”) | ||
June 30, 2020 | | Value | | Amount | | Coupon (1) | | (years)(2) | ||
Loans held-for-investment: | | | | | | | | | | |
Commercial loans: | | | | | | | | | | |
First mortgages (3) | | $ | 8,095,262 | | $ | 8,114,492 | | 5.3 | % | 1.7 |
Subordinated mortgages (4) | |
| 68,891 | | | 70,101 | | 8.8 | % | 3.3 |
Mezzanine loans (3) | |
| 593,823 | | | 593,505 | | 10.3 | % | 1.9 |
Other | | | 30,804 | | | 34,452 | | 8.9 | % | 2.1 |
Total commercial loans | | | 8,788,780 | | | 8,812,550 | | | | |
Infrastructure first priority loans | | | 1,475,564 | | | 1,493,693 | | 4.2 | % | 4.5 |
Residential mortgage loans, fair value option (5) | | | 267,730 | | | 260,542 | | 6.2 | % | 3.8 |
Total loans held-for-investment | |
| 10,532,074 | | | 10,566,785 | | | | |
Loans held-for-sale: | | | | | | | | | | |
Residential, fair value option (5) | | | 432,786 | | | 429,966 | | 6.2 | % | 3.7 |
Commercial, fair value option | | | 194,097 | | | 191,229 | | 3.9 | % | 10.0 |
Infrastructure, lower of cost or fair value | | | 45,001 | | | 46,111 | | 2.1 | % | 1.6 |
Total loans held-for-sale | | | 671,884 | | | 667,306 | | | | |
Total gross loans | |
| 11,203,958 | | $ | 11,234,091 | | | | |
Credit loss allowances: | | | | | | | | | | |
Commercial loans held-for-investment | | | (94,947) | | | | | | | |
Infrastructure loans held-for-investment | | | (16,325) | | | | | | | |
Total held-for-investment allowances | | | (111,272) | | | | | | | |
Infrastructure loans held-for-sale with a fair value allowance | | | (125) | | | | | | | |
Total allowances | | | (111,397) | | | | | | | |
Total net loans | | $ | 11,092,561 | | | | | | | |
| | | | | | | | | | |
December 31, 2019 | | | | | | | | | | |
Loans held-for-investment: | | | | | | | | | | |
Commercial loans: | | | | | | | | | | |
First mortgages (3) | | $ | 7,928,026 | | $ | 7,962,788 | | 5.8 | % | 2.0 |
Subordinated mortgages (4) | |
| 75,724 | |
| 77,055 | | 8.8 | % | 3.4 |
Mezzanine loans (3) | |
| 484,164 | |
| 484,408 | | 11.0 | % | 1.9 |
Other | | | 62,555 | | | 66,525 | | 8.2 | % | 1.6 |
Total commercial loans | | | 8,550,469 | | | 8,590,776 | | | | |
Infrastructure first priority loans | | | 1,397,448 | |
| 1,416,164 | | 5.6 | % | 4.9 |
Residential mortgage loans, fair value option | | | 671,572 | | | 654,925 | | 6.1 | % | 3.8 |
Total loans held-for-investment | |
| 10,619,489 | | | 10,661,865 | | | | |
Loans held-for-sale: | | | | | | | | | | |
Residential, fair value option | | | 605,384 | | | 587,144 | | 6.2 | % | 3.9 |
Commercial, fair value option | | | 159,238 | | | 160,635 | | 3.9 | % | 10.0 |
Infrastructure, lower of cost or fair value | | | 119,724 | | | 121,271 | | 3.3 | % | 2.1 |
Total loans held-for-sale | | | 884,346 | | | 869,050 | | | | |
Total gross loans | |
| 11,503,835 | | $ | 11,530,915 | | | | |
Credit loss allowances: | | | | | | | | | | |
Commercial loans held-for-investment | | | (33,415) | | | | | | | |
Infrastructure loans held-for-investment | | | — | | | | | | | |
Total held-for-investment allowances | | | (33,415) | | | | | | | |
Infrastructure loans held-for-sale with a fair value allowance | | | (196) | | | | | | | |
Total allowances | | | (33,611) | | | | | | | |
Total net loans | | $ | 11,470,224 | | | | | | | |
20
(1) |
|
(2) | Represents the WAL of each respective group of loans as of the respective balance sheet date. The WAL of each individual loan is calculated using amounts and timing of future principal payments, as projected at origination or acquisition. |
(3) |
| First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of |
(4) |
| Subordinated mortgages include B-Notes and junior participation in first mortgages where we do not own the senior A-Note or senior participation. If we own both the A-Note and B-Note, we categorize the loan as a first mortgage loan. |
(5) | During the six months ended June 30, 2020, $422.7 million of residential loans held-for-investment were reclassified into residential loans held-for-sale. |
21
As of SeptemberJune 30, 2017, approximately $5.9 billion, or 92.6%, of2020, our variable rate loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.2%. The following table summarizes our investments in floating rate loansas follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||
|
|
|
| Carrying |
|
|
| Carrying |
| ||
Index |
| Base Rate |
| Value |
| Base Rate |
| Value |
| ||
One-month LIBOR USD |
| 1.2322 | % | $ | 612,994 |
| 0.7717 | % | $ | 880,357 |
|
LIBOR floor |
| 0.15 - 1.24 | % (1) |
| 5,301,987 |
| 0.15 - 3.00 | % (1) |
| 4,449,861 |
|
Total |
|
|
| $ | 5,914,981 |
|
|
| $ | 5,330,218 |
|
| | | | | | |
| | Carrying | | Weighted-average | | |
June 30, 2020 | | Value | | Spread Above Index | | |
Commercial loans | | $ | 8,195,089 | | 4.2 | % |
Infrastructure loans | | | 1,475,564 | | 3.7 | % |
Total variable rate loans held-for-investment | | $ | 9,670,653 | | 4.1 | % |
Credit Loss Allowances
As discussed in Note 2, we do not have a history of realized credit losses on our HFI loans and HTM securities, so we have subscribed to third party database services to provide us with industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios.
For our commercial loans, we utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading CMBS data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-stabilized-value (LTV) and debt service coverage ratio (DSCR) metrics, as well as principal balances, property type, location, coupon, origination year, term, subordination, expected repayment dates and future fundings. We also select from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our commercial loans, as set forth in the credit quality indicator table below. A lower LTV ratio typically indicates a lower credit loss risk.
For our infrastructure loans, we utilize a database of historical infrastructure loan performance that is shared among a consortium of banks and other lenders and compiled by a major bond credit rating agency. The database is representative of industry-wide project finance activity dating back to 1983. We derive historical loss rates from the database filtered by industry, sub-industry, term and construction status for each of our infrastructure loans. Those historical loss rates reflect global economic cycles over a long period of time as well as average recovery rates. However, due to limited information in the first 20 years covered by the database, we have further applied a recessionary multiplier to those historical loss rates as of June 30, 2020 to reflect the current economic deterioration caused by the COVID-19 pandemic which seems to most closely resemble the magnitude of the economic distress of the 2008
21
|
|
financial crisis. We categorize the results between the power and oil and gas industries, which we consider the most significant indicator of credit quality for our infrastructure loans, as set forth in the credit quality indicator table below.
Our loans are typically collateralized by real estate.
As discussed in Note 2, we use a result, wediscounted cash flow or collateral value approach, rather than the industry loan loss approach described above, to determine credit loss allowances for any credit deteriorated loans.
We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, property, as well as the financial and operating capability of the borrower. Specifically, a property’sthe collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’scollateral’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties.collateral. In addition, we consider the overall economic environment, real estate or industry sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.
Our evaluation process, as described above produces an internal risk rating between 1 and 5, which is a weighted average of the numerical ratings in the following categories: (i) sponsor capability and financial condition, (ii) loan and collateral performance relative to underwriting, (iii) quality and stability of collateral cash flows, and (iv) loan structure. We utilize the overall risk ratings as a concise means to monitor any credit migration on a loan as well as on the whole portfolio. While the overall risk rating is generally not the sole factor we use in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment, and therefore would be more likely to experience a credit loss.
22
The rating categories generally include the characteristics described below, but these are utilized as guidelines and therefore not every loan will have all of the characteristics described in each category:
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|
23
As of September 30, 2017, the risk ratingssignificant credit quality indicators for our loans subject to our rating system,measured at amortized cost, which excludes loans for which the fair value option has been elected, by class of loanheld-for-sale, were as follows as of June 30, 2020 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Sheet Classification |
|
|
|
|
|
| ||||||||||||||||
|
| Loans Held-For-Investment |
|
|
|
| Loans |
|
|
|
| % of |
| |||||||||||
Risk Rating |
| First |
| Subordinated |
| Mezzanine |
|
|
| Loans Held- |
| As Secured |
|
|
| Total |
| |||||||
Category |
| Mortgages |
| Mortgages |
| Loans |
| Other |
| For-Sale |
| Borrowings |
| Total |
| Loans |
| |||||||
1 |
| $ | 2,205 |
| $ | — |
| $ | — |
| $ | 20,446 |
| $ | — |
| $ | — |
| $ | 22,651 |
| 0.3 | % |
2 |
|
| 2,109,411 |
|
| 4,424 |
|
| 132,843 |
|
| — |
|
| — |
|
| — |
|
| 2,246,678 |
| 31.8 | % |
3 |
|
| 3,164,497 |
|
| 218,566 |
|
| 423,779 |
|
| 2,772 |
|
| — |
|
| 74,339 |
|
| 3,883,953 |
| 54.9 | % |
4 |
|
| 194,916 |
|
| — |
|
| 58,940 |
|
| — |
|
| — |
|
| — |
|
| 253,856 |
| 3.6 | % |
5 |
|
| 56,190 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 56,190 |
| 0.8 | % |
N/A |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 608,624 |
|
| — |
|
| 608,624 |
| 8.6 | % |
|
| $ | 5,527,219 |
| $ | 222,990 |
| $ | 615,562 |
| $ | 23,218 |
| $ | 608,624 |
| $ | 74,339 |
| $ | 7,071,952 |
| 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Term Loans |
| Revolving Loans |
| Total |
| Credit | |||||||||||||||||||
| | Amortized Cost Basis by Origination Year | | Amortized Cost | | Amortized | | Loss | |||||||||||||||||||
As of June 30, 2020 | | 2020 |
| 2019 |
| 2018 |
| 2017 |
| 2016 |
| Prior | | Total | | Cost Basis | | Allowance | |||||||||
Commercial loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LTV < 60% | | $ | 499,114 | | $ | 1,004,947 | | $ | 915,109 | | $ | 973,889 | | $ | 152,365 | | $ | 252,631 | | $ | — | | $ | 3,798,055 | | $ | 13,295 |
LTV 60% - 70% | | | 265,570 | | | 1,128,883 | | | 1,745,905 | | | 449,146 | | | 53,418 | | | 169,219 | | | — | | | 3,812,141 | | | 41,221 |
LTV > 70% | | | 31,649 | | | 822,181 | | | 93,094 | | | — | | | — | | | 60,814 | | | — | | | 1,007,738 | | | 10,578 |
Credit deteriorated | | | — | | | — | | | 34,454 | | | 7,755 | | | — | | | 105,589 | | | — | | | 147,798 | | | 29,853 |
Defeased and other | | | — | | | — | | | — | | | — | | | — | | | 23,048 | | | — | | | 23,048 | | | — |
Total commercial | | $ | 796,333 | | $ | 2,956,011 | | $ | 2,788,562 | | $ | 1,430,790 | | $ | 205,783 | | $ | 611,301 | | $ | — | | $ | 8,788,780 | | $ | 94,947 |
Infrastructure loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Credit quality indicator: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Power | | $ | — | | $ | 248,691 | | $ | 304,589 | | $ | 123,558 | | $ | 189,365 | | $ | 302,918 | | $ | 24,736 | | $ | 1,193,857 | | $ | 9,139 |
Oil and gas | | | — | | | 196,775 | | | 84,932 | | | — | | | — | | | — | | | — | | | 281,707 | | | 7,186 |
Total infrastructure | | $ | — | | $ | 445,466 | | $ | 389,521 | | $ | 123,558 | | $ | 189,365 | | $ | 302,918 | | $ | 24,736 | | $ | 1,475,564 | | $ | 16,325 |
Residential loans held-for-investment, fair value option | | | | | | | | | | | | | | | | | | | | | | | | 267,730 | | | — |
Loans held-for-sale | | | | | | | | | | | | | | | | | | | | | | | | 671,884 | | | 125 |
Total gross loans | | | | | | | | | | | | | | | | | | | | | | | $ | 11,203,958 | | $ | 111,397 |
As of December 31, 2016, the risk ratings forJune 30, 2020, certain first mortgage, mezzanine and unsecured promissory loans subjectwith an amortized cost basis of $101.4 million related to our rating system, which excludes loans for which the fair value option has been elected, by classa residential conversion project and 2 subordinated mortgages on department stores with an amortized cost basis of loan$12.0 million were as follows (dollars in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance Sheet Classification |
|
|
|
|
|
| |||||||||||||
|
| Loans Held-For-Investment |
|
|
|
| Loans |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Transferred |
|
|
|
| % of |
| |
Risk Rating |
| First |
| Subordinated |
| Mezzanine |
| Loans Held- |
| As Secured |
|
|
|
| Total |
| |||||
Category |
| Mortgages |
| Mortgages |
| Loans |
| For-Sale |
| Borrowings |
| Total |
| Loans |
| ||||||
1 |
| $ | 921 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 921 |
| — | % |
2 |
|
| 1,092,731 |
|
| 27,069 |
|
| 194,803 |
|
| — |
|
| 35,000 |
|
| 1,349,603 |
| 22.6 | % |
3 |
|
| 3,348,874 |
|
| 250,963 |
|
| 425,972 |
|
| — |
|
| — |
|
| 4,025,809 |
| 67.6 | % |
4 |
|
| 365,151 |
|
| — |
|
| 92,982 |
|
| — |
|
| — |
|
| 458,133 |
| 7.7 | % |
5 |
|
| 58,317 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 58,317 |
| 1.0 | % |
N/A |
|
| — |
|
| — |
|
| — |
|
| 63,279 |
|
| — |
|
| 63,279 |
| 1.1 | % |
|
| $ | 4,865,994 |
| $ | 278,032 |
| $ | 713,757 |
| $ | 63,279 |
| $ | 35,000 |
| $ | 5,956,062 |
| 100.0 | % |
After completing our impairment evaluation process as of September 30, 2017, we concluded that none of our loans were impairedcredit deteriorated and therefore no individual loan impairment charges were required on any individual loans, as we expect to collect all outstanding principal and interest. None of our loans were 90 days or greater past due, as were $14.0 million of September 30, 2017.
24
residential loans. In accordance with our policies, we record an allowanceinterest income recognition policy, these loans, along with a $34.5 million credit deteriorated loan that is not 90 days or greater past due (also related to the residential conversion project), were placed on non-accrual status. We apply the cost recovery method of interest income recognition for loan losses equalall these credit deteriorated loans. Any loans which are modified to (i) 1.5%provide for the deferral of the aggregate carrying amountinterest are not considered past due and are accounted for in accordance with our revenue recognition policy on interest income.
22
The following table presentstables present the activity in our credit loss allowance for loan lossesfunded loans and unfunded commitments (amounts in thousands):
| | | | | | | | | | | | |
| | Funded Commitments Credit Loss Allowance | ||||||||||
|
| |
| Loans |
| | ||||||
| | Loans Held-for-Investment | | Held-for-Sale | | Total | ||||||
Six Months Ended June 30, 2020 | | Commercial | | Infrastructure | | Infrastructure | | Funded Loans | ||||
Credit loss allowance at December 31, 2019 | | $ | 33,415 | | $ | — | | $ | 196 | | $ | 33,611 |
Cumulative effect of ASC 326 effective January 1, 2020 | | | 10,112 | | | 10,328 | | | — | | | 20,440 |
Credit loss provision, net | |
| 51,420 | |
| 5,997 | |
| — | |
| 57,417 |
Charge-offs | |
| — | |
| — | |
| (71) | |
| (71) |
Recoveries | |
| — | |
| — | |
| — | |
| — |
Credit loss allowance at June 30, 2020 | | $ | 94,947 | | $ | 16,325 | | $ | 125 | | $ | 111,397 |
| | | | | | | | | | | | |
| | Unfunded Commitments Credit Loss Allowance (1) | ||||||||||
| | Loans Held-for-Investment | | HTM Preferred | | | ||||||
Six Months Ended June 30, 2020 |
| Commercial |
| Infrastructure |
| Interests (2) |
| Total | ||||
Credit loss allowance at December 31, 2019 | | $ | — | | $ | — | | $ | — | | $ | — |
Cumulative effect of ASC 326 effective January 1, 2020 | | | 8,348 | | | 2,205 | | | — | | | 10,553 |
Credit loss (reversal) provision, net | |
| (3,303) | |
| 1,371 | |
| 625 | |
| (1,307) |
Credit loss allowance at June 30, 2020 | | $ | 5,045 | | $ | 3,576 | | $ | 625 | | $ | 9,246 |
Memo: Unfunded commitments as of June 30, 2020 (3) | | $ | 1,870,914 | | $ | 132,905 | | $ | 6,419 | | $ | 2,010,238 |
|
|
|
|
|
|
|
|
| For the Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Allowance for loan losses at January 1 |
| $ | 9,788 |
| $ | 6,029 |
Provision for loan losses |
|
| (3,170) |
|
| 3,395 |
Charge-offs |
|
| — |
|
| — |
Recoveries |
|
| — |
|
| — |
Allowance for loan losses at September 30 |
| $ | 6,618 |
| $ | 9,424 |
Recorded investment in loans related to the allowance for loan loss |
| $ | 310,046 |
| $ | 488,576 |
(1) | Included in accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheet. |
(2) | See Note 5 for further details. |
(3) | Represents amounts expected to be funded (see Note 21). |
23
Loan Portfolio Activity
The activity in our loan portfolio was as follows (amounts in thousands):
| | | | | | | | | | | | | | | |
| | Held-for-Investment Loans | | | | | | | |||||||
Six Months Ended June 30, 2020 | | Commercial | | Infrastructure | | Residential | | Held-for-Sale Loans | | Total Loans | |||||
Balance at December 31, 2019 | | $ | 8,517,054 | | $ | 1,397,448 | | $ | 671,572 | | $ | 884,150 | | $ | 11,470,224 |
Cumulative effect of ASC 326 effective January 1, 2020 | | | (10,112) | | | (10,328) | | | — | | | — | | | (20,440) |
Acquisitions/originations/additional funding | |
| 1,452,753 | |
| 113,430 | |
| 100,720 | |
| 786,860 | |
| 2,453,763 |
Capitalized interest (1) | |
| 70,346 | |
| — | |
| — | |
| — | |
| 70,346 |
Basis of loans sold (2) | |
| (397,038) | |
| — | |
| (604) | |
| (1,378,952) | |
| (1,776,594) |
Loan maturities/principal repayments | |
| (831,319) | |
| (68,585) | |
| (64,806) | |
| (43,593) | |
| (1,008,303) |
Discount accretion/premium amortization | |
| 19,706 | |
| 1,025 | |
| — | |
| 109 | |
| 20,840 |
Changes in fair value | |
| — | |
| — | |
| (16,461) | |
| 34,777 | |
| 18,316 |
Unrealized foreign currency translation loss | |
| (76,137) | |
| — | |
| — | |
| (2,037) | |
| (78,174) |
Credit loss provision, net | |
| (51,420) | |
| (5,997) | |
| — | |
| — | |
| (57,417) |
Transfer to/from other asset classifications | | | — | | | 32,246 | | | (422,691) | | | 390,445 | | | — |
Balance at June 30, 2020 | | $ | 8,693,833 | | $ | 1,459,239 | | $ | 267,730 | | $ | 671,759 | | $ | 11,092,561 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Loans | | | | |
| | | | | | | | | | | Transferred | | | | |
| | Held-for-Investment Loans | | | | | As Secured | | | | |||||
Six Months Ended June 30, 2019 | | Commercial | | Infrastructure | | Held-for-Sale Loans | | Borrowings | | Total Loans | |||||
Balance at December 31, 2018 | | $ | 7,075,577 | | $ | 1,456,779 | | $ | 1,187,552 | | $ | 74,346 | | $ | 9,794,254 |
Acquisitions/originations/additional funding | |
| 1,707,180 | |
| 334,303 | |
| 1,663,244 | |
| — | |
| 3,704,727 |
Capitalized interest (1) | |
| 52,405 | |
| — | |
| — | |
| — | |
| 52,405 |
Basis of loans sold (2) | |
| (495,456) | |
| — | |
| (1,271,931) | |
| — | |
| (1,767,387) |
Loan maturities/principal repayments | |
| (959,160) | |
| (333,607) | |
| (80,134) | |
| (74,692) | |
| (1,447,593) |
Discount accretion/premium amortization | |
| 15,448 | |
| 318 | |
| — | |
| 346 | |
| 16,112 |
Changes in fair value | |
| — | |
| — | |
| 33,157 | |
| — | |
| 33,157 |
Unrealized foreign currency translation (loss) gain | |
| (5,396) | |
| — | |
| 1,493 | |
| — | |
| (3,903) |
Credit loss provision, net | |
| (2,085) | |
| — | |
| (1,196) | |
| — | |
| (3,281) |
Loan foreclosures | | | (27,303) | | | — | | | — | | | — | | | (27,303) |
Transfer to/from other asset classifications | | | 46,495 | | | (101,282) | | | 54,714 | | | — | | | (73) |
Balance at June 30, 2019 | | $ | 7,407,705 | | $ | 1,356,511 | | $ | 1,586,899 | | $ | — | | $ | 10,351,115 |
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended |
| ||||
|
| September 30, |
| ||||
|
| 2017 |
| 2016 |
| ||
Balance at January 1 |
| $ | 5,946,274 |
| $ | 6,263,517 |
|
Acquisitions/originations/additional funding |
|
| 3,722,624 |
|
| 2,795,772 |
|
Capitalized interest (1) |
|
| 55,987 |
|
| 65,003 |
|
Basis of loans sold (2) |
|
| (1,024,964) |
|
| (1,359,780) |
|
Loan maturities/principal repayments |
|
| (1,742,494) |
|
| (2,188,583) |
|
Discount accretion/premium amortization |
|
| 27,014 |
|
| 38,809 |
|
Changes in fair value |
|
| 45,484 |
|
| 70,122 |
|
Unrealized foreign currency remeasurement gain (loss) |
|
| 31,395 |
|
| (37,332) |
|
Change in loan loss allowance, net |
|
| 3,170 |
|
| (3,395) |
|
Transfer to/from other asset classifications |
|
| 844 |
|
| 36,566 | (3) |
Balance at September 30 |
| $ | 7,065,334 |
| $ | 5,680,699 |
|
|
|
|
|
|
|
(1) Represents accrued interest income on loans whose terms do not require current payment of interest.
(2) See Note 11 for additional disclosure on these transactions.
25
24
Investment securities were comprised of the following as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
| | | | | | |
| | Carrying Value as of | ||||
| | June 30, 2020 |
| December 31, 2019 | ||
RMBS, available-for-sale | | $ | 174,281 | | $ | 189,576 |
RMBS, fair value option (1) | | | 328,270 | | | 147,034 |
CMBS, fair value option (1), (2) | |
| 1,198,784 | |
| 1,295,363 |
HTM debt securities, amortized cost net of credit loss allowance of $6,891 and $0 | |
| 544,423 | |
| 570,638 |
Equity security, fair value | |
| 9,791 | |
| 12,664 |
Subtotal—Investment securities | |
| 2,255,549 | |
| 2,215,275 |
VIE eliminations (1) | |
| (1,503,524) | | | (1,405,037) |
Total investment securities | | $ | 752,025 | | $ | 810,238 |
|
|
|
|
|
|
|
|
| Carrying Value as of | ||||
|
| September 30, 2017 |
| December 31, 2016 | ||
RMBS, available-for-sale |
| $ | 253,252 |
| $ | 253,915 |
CMBS, fair value option (1) |
|
| 1,026,634 |
|
| 990,570 |
Held-to-maturity (“HTM”) securities |
|
| 411,196 |
|
| 509,980 |
Equity security, fair value option |
|
| 13,529 |
|
| 12,177 |
Subtotal—Investment securities |
|
| 1,704,611 |
|
| 1,766,642 |
VIE eliminations (1) |
|
| (1,002,793) |
|
| (959,024) |
Total investment securities |
| $ | 701,818 |
| $ | 807,618 |
(1) |
| Certain fair value option CMBS and RMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810. |
(2) | Includes $174.7 million and $186.6 million of non-controlling interests in the consolidated entities which hold certain of these CMBS as of June 30, 2020 and December 31, 2019, respectively. |
Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | RMBS, | | RMBS, fair | | CMBS, fair | | HTM | | Equity | | Securitization | | | | ||||||
|
| available-for-sale |
| value option |
| value option |
| Securities |
| Security |
| VIEs (1) |
| Total | |||||||
Three Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | | | |||
Purchases/fundings | | $ | — | | $ | 185,433 | | $ | — | | $ | 10,391 | | $ | — | | $ | (185,433) | | $ | 10,391 |
Sales | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Principal collections | |
| 6,014 | |
| 11,532 | |
| 927 | |
| 30,713 | |
| — | |
| (12,266) | |
| 36,920 |
Three Months Ended June 30, 2019 | | | | | | | | | | | | | | | | | | | |||
Purchases | | $ | — | | $ | — | | $ | 38,951 | | $ | — | | $ | — | | $ | (38,951) | | $ | — |
Sales | |
| — | |
| 41,501 | |
| 25,795 | |
| — | |
| — | |
| (66,546) | |
| 750 |
Principal collections | |
| 6,417 | |
| 3,058 | |
| 12,072 | |
| 53,462 | |
| — | |
| (9,728) | |
| 65,281 |
| | | | | | | | | | | | | | | | | | | | | |
| | RMBS, | | RMBS, fair | | CMBS, fair | | HTM | | Equity | | Securitization | | | | ||||||
|
| available-for-sale |
| value option |
| value option |
| Securities |
| Security |
| VIEs (1) |
| Total | |||||||
Six Months Ended June 30, 2020 | | | | | | | | | | | | | | | | | | | |||
Purchases/fundings | | $ | — | | $ | 214,725 | | $ | 7,661 | | $ | 16,120 | | $ | — | | $ | (222,386) | | $ | 16,120 |
Sales | |
| — | |
| — | |
| 32,316 | |
| — | |
| — | |
| (24,376) | |
| 7,940 |
Principal collections | |
| 12,563 | |
| 20,104 | |
| 17,450 | |
| 37,351 | |
| — | |
| (36,989) | |
| 50,479 |
Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | | | | | |||
Purchases | | $ | — | | $ | 26,272 | | $ | 52,213 | | $ | — | | $ | — | | $ | (78,485) | | $ | — |
Sales | |
| — | |
| 41,501 | |
| 62,701 | |
| — | |
| — | |
| (100,224) | |
| 3,978 |
Principal collections | |
| 12,777 | |
| 5,092 | |
| 21,909 | |
| 54,668 | |
| — | |
| (21,411) | |
| 73,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| RMBS, |
| CMBS, fair |
| HTM |
| Equity |
|
|
| ||||
|
| available-for-sale |
| value option |
| Securities |
| Security |
| Total | |||||
Three Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases (1) |
| $ | — |
| $ | 11,798 |
| $ | 50,000 |
| $ | — |
| $ | 61,798 |
Sales (2) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
Principal collections |
|
| 10,307 |
|
| 1,666 |
|
| 111,671 |
|
| — |
|
| 123,644 |
Three Months Ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases (1) |
| $ | 8,868 |
| $ | — |
| $ | — |
| $ | — |
| $ | 8,868 |
Sales (2) |
|
| — |
|
| 17,456 | (5) |
| — |
|
| — |
|
| 17,456 |
Principal collections |
|
| 9,917 |
|
| 12,289 |
|
| 566 |
|
| — |
|
| 22,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| RMBS, |
| CMBS, fair |
| HTM |
| Equity |
|
|
| ||||
|
| available-for-sale |
| value option |
| Securities |
| Security |
| Total | |||||
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases (3) |
| $ | 7,433 |
| $ | 11,798 |
| $ | 50,000 |
| $ | — |
| $ | 69,231 |
Sales (4) |
|
| — |
|
| 11,134 |
|
| — |
|
| — |
|
| 11,134 |
Principal collections |
|
| 29,090 |
|
| 8,754 |
|
| 172,059 |
|
| — |
|
| 209,903 |
Nine Months Ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases (3) |
| $ | 97,204 |
| $ | 57,576 |
| $ | 204,730 |
| $ | — |
| $ | 359,510 |
Sales (4) |
|
| — |
|
| 18,725 | (5) |
| — |
|
| — |
|
| 18,725 |
Principal collections |
|
| 32,925 |
|
| 31,734 |
|
| 5,657 |
|
| — |
|
| 70,316 |
(1) |
|
|
|
|
26
|
|
|
|
|
|
RMBS, Available-for-Sale
The Company classified all of its RMBS not eliminated in consolidation as available-for-sale as of SeptemberJune 30, 20172020 and December 31, 2016.2019. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).
25
The tables below summarize various attributes of our investments in available-for-sale RMBS as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Unrealized Gains or (Losses) | | | | |||||||
| | | | | | | | | | | Recognized in AOCI | | | | |||||||
|
| |
| Credit |
| |
| Gross |
| Gross |
| Net |
| | | ||||||
| | Amortized | | Loss | | Net | | Unrealized | | Unrealized | | Fair Value | | | | ||||||
| | Cost | | Allowance | | Basis | | Gains | | Losses | | Adjustment | | Fair Value | |||||||
June 30, 2020 | | | | | | | | | | | | | | | | | | | | | |
RMBS | | $ | 131,351 | | $ | — | | $ | 131,351 | | $ | 43,179 | | $ | (249) | | $ | 42,930 | | $ | 174,281 |
December 31, 2019 | | | | | | | | | | | | | | | | | | | | | |
RMBS | | $ | 138,580 | | $ | N/A | | $ | 138,580 | | $ | 51,310 | | $ | (314) | | $ | 50,996 | | $ | 189,576 |
| | | | | | |
|
| Weighted Average Coupon (1) |
| Weighted Average |
| WAL |
June 30, 2020 | | | | | | |
RMBS |
| 1.6 | % | B+ |
| 5.8 |
December 31, 2019 | | | | | | |
RMBS |
| 3.1 | % | BB- | | 5.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized Gains or (Losses) |
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| Recognized in AOCI |
|
|
| ||||||||||
|
| Purchase |
|
|
|
| Recorded |
|
|
|
| Gross |
| Gross |
| Net |
|
|
| |||||
|
| Amortized |
| Credit |
| Amortized |
| Non-Credit |
| Unrealized |
| Unrealized |
| Fair Value |
|
|
| |||||||
|
| Cost |
| OTTI |
| Cost |
| OTTI |
| Gains |
| Losses |
| Adjustment |
| Fair Value | ||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
| $ | 207,492 |
| $ | (9,897) |
| $ | 197,595 |
| $ | (95) |
| $ | 55,766 |
| $ | (14) |
| $ | 55,657 |
| $ | 253,252 |
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS |
| $ | 219,171 |
| $ | (10,185) |
| $ | 208,986 |
| $ | (94) |
| $ | 45,113 |
| $ | (90) |
| $ | 44,929 |
| $ | 253,915 |
|
|
|
|
|
|
|
|
| Weighted Average Coupon (1) |
| Weighted Average |
| WAL |
September 30, 2017 |
|
|
|
|
|
|
RMBS |
| 2.5 | % | B- |
| 6.4 |
December 31, 2016 |
|
|
|
|
|
|
RMBS |
| 2.1 | % | B |
| 6.1 |
(1) |
| Calculated using the |
(2) |
| Represents the remaining WAL of each respective group of securities as of the respective balance sheet date. The WAL of each individual security is calculated using projected amounts and projected timing of future principal payments. |
As of SeptemberJune 30, 2017,2020, approximately $211.6$147.7 million, or 83.6%84.8%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.21%1.26%. As of December 31, 2016,2019, approximately $211.1$160.9 million, or 83.2%84.9%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.22%1.24%. We purchased all of the RMBS at a discount, that will bea portion of which is accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of these discounts.this accretable discount.
27
The following table contains a reconciliation of aggregate principal balance to amortized cost for our RMBS as of September 30, 2017 and December 31, 2016 (amounts in thousands):
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||
Principal balance |
| $ | 379,432 |
| $ | 399,883 |
|
Accretable yield |
|
| (58,763) |
|
| (64,290) |
|
Non-accretable difference |
|
| (123,074) |
|
| (126,607) |
|
Total discount |
|
| (181,837) |
|
| (190,897) |
|
Amortized cost |
| $ | 197,595 |
| $ | 208,986 |
|
The principal balance of credit deteriorated RMBS was $356.2 million and $371.5 million as of September 30, 2017 and December 31, 2016, respectively. Accretable yield related to these securities totaled $51.8 million and $55.9 million as of September 30, 2017 and December 31, 2016, respectively.
The following table discloses the changes to accretable yield and non-accretable difference for our RMBS during the three and nine months ended September 30, 2017 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
| Non-Accretable | ||
Three Months Ended September 30, 2017 |
| Accretable Yield |
| Difference | ||
Balance as of July 1, 2017 |
| $ | 59,777 |
| $ | 126,708 |
Accretion of discount |
|
| (3,187) |
|
| — |
Principal write-downs, net |
|
| — |
|
| (1,461) |
Purchases |
|
| — |
|
| — |
Sales |
|
| — |
|
| — |
OTTI |
|
| — |
|
| — |
Transfer to/from non-accretable difference |
|
| 2,173 |
|
| (2,173) |
Balance as of September 30, 2017 |
| $ | 58,763 |
| $ | 123,074 |
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
Balance as of January 1, 2017 |
| $ | 64,290 |
| $ | 126,607 |
Accretion of discount |
|
| (10,375) |
|
| — |
Principal write-downs, net |
|
| — |
|
| (3,828) |
Purchases |
|
| 311 |
|
| 4,723 |
Sales |
|
| — |
|
| — |
OTTI |
|
| 109 |
|
| — |
Transfer to/from non-accretable difference |
|
| 4,428 |
|
| (4,428) |
Balance as of September 30, 2017 |
| $ | 58,763 |
| $ | 123,074 |
We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.5$0.3 million and $0.4 million for the three months ended SeptemberJune 30, 20172020 and 20162019, respectively, and $1.4$0.7 million and $1.2$0.8 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, which has been recorded as management fees in the accompanying condensed consolidated statements of operations.
28
The following table presents the gross unrealized losses and estimated fair value of any available-for-sale securities that were in an unrealized loss position as of SeptemberJune 30, 20172020 and December 31, 2016,2019, and for which OTTIs (full or partial) havean allowance for credit losses has not been recognized in earningsrecorded (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Estimated Fair Value |
| Unrealized Losses |
| |||||||||||||||||||||
|
| Securities with a |
| Securities with a |
| Securities with a |
| Securities with a |
| |||||||||||||||||
|
| loss less than |
| loss greater than |
| loss less than |
| loss greater than |
| |||||||||||||||||
|
| 12 months |
| 12 months |
| 12 months |
| 12 months |
| |||||||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Estimated Fair Value | | Unrealized Losses |
| |||||||||||||||||||||
|
| Securities with a |
| Securities with a |
| Securities with a |
| Securities with a |
| |||||||||||||||||
| | loss less than | | loss greater than | | loss less than | | loss greater than |
| |||||||||||||||||
| | 12 months | | 12 months | | 12 months | | 12 months |
| |||||||||||||||||
As of June 30, 2020 | | | | | | | | | | | | | | |||||||||||||
RMBS |
| $ | 10,463 |
| $ | 645 |
| $ | (80) |
| $ | (29) |
| | $ | 675 | | $ | 1,173 | | $ | (19) | | $ | (230) | |
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
As of December 31, 2019 | | | | | | | | | | | | | | |||||||||||||
RMBS |
| $ | 8,819 |
| $ | 957 |
| $ | (90) |
| $ | (94) |
| | $ | — | | $ | 1,380 | | $ | — | | $ | (314) | |
As of both SeptemberJune 30, 20172020 and December 31, 2016,2019, there were three3 securities and 1 security, respectively, with unrealized losses reflected in the table above. After evaluating thesethe securities and recording adjustments for credit-related OTTI,credit losses, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses which represent most of the OTTI we record on securities, are calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of
26
the last date previously revised, to (ii) our net amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or impairmentscredit losses could be materially different from what is currently projected and/or reported.
CMBS and RMBS, Fair Value Option
As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for the Investingcertain CMBS and Servicing Segment’s CMBSRMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of SeptemberJune 30, 2017,2020, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $1.0$1.2 billion and $4.1$2.7 billion, respectively. The $1.0 billionAs of June 30, 2020, the fair value and unpaid principal balance of RMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $328.3 million and $266.8 million, respectively. The $1.5 billion total fair value balance of CMBS and RMBS represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value (all except $23.8$23.5 million at SeptemberJune 30, 2017)2020) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS.investment securities.
As of SeptemberJune 30, 2017, none2020, $104.2 million of our CMBS where we have elected the fair value optionwere variable rate and NaN of our RMBS were variable rate.
HTM Debt Securities, Amortized Cost
The table below summarizes unrealized gains and losses of our investments in HTM debt securities as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
| Net Carrying Amount |
| Gross Unrealized |
| Gross Unrealized |
|
|
|
| ||||||||||||||||||||||
|
| (Amortized Cost) |
| Holding Gains |
| Holding Losses |
| Fair Value |
| |||||||||||||||||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||
| | Amortized | | Credit Loss | | Net Carrying | | Gross Unrealized | | Gross Unrealized | | | |
| ||||||||||||||||||
| | Cost Basis | | Allowance | | Amount | | Holding Gains | | Holding Losses | | Fair Value |
| |||||||||||||||||||
June 30, 2020 |
| | | | | | | | | | | |
| | |
| | |
| |||||||||||||
CMBS |
| $ | 390,966 |
| $ | 2,446 |
| $ | (5,875) |
| $ | 387,537 |
| | $ | 349,023 | | $ | — | | $ | 349,023 | | $ | — | | $ | (24,236) | | $ | 324,787 | |
Preferred interests |
|
| 20,230 |
|
| 675 |
|
| — |
|
| 20,905 |
| | | 158,971 | | | (3,883) | | | 155,088 | | | — | | | (7,587) | | | 147,501 | |
Infrastructure bonds | | | 43,320 | | | (3,008) | | | 40,312 | | | 174 | | | (281) | | | 40,205 | | |||||||||||||
Total |
| $ | 411,196 |
| $ | 3,121 |
| $ | (5,875) |
| $ | 408,442 |
| | $ | 551,314 | | $ | (6,891) | | $ | 544,423 | | $ | 174 | | $ | (32,104) | | $ | 512,493 | |
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||
December 31, 2019 | | | | | | | | | | | | | | | | | | | | |||||||||||||
CMBS |
| $ | 490,107 |
| $ | 2,106 |
| $ | (8,648) |
| $ | 483,565 |
| | $ | 383,473 | | $ | — | | $ | 383,473 | | $ | 946 | | $ | (3,001) | | $ | 381,418 | |
Preferred interests |
|
| 19,873 |
|
| 727 |
|
| — |
|
| 20,600 |
| | | 142,012 | | | — | | | 142,012 | | | 1,148 | | | (353) | | | 142,807 | |
Infrastructure bonds | | | 45,153 | | | — | | | 45,153 | | | — | | | (651) | | | 44,502 | | |||||||||||||
Total |
| $ | 509,980 |
| $ | 2,833 |
| $ | (8,648) |
| $ | 504,165 |
| | $ | 570,638 | | $ | — | | $ | 570,638 | | $ | 2,094 | | $ | (4,005) | | $ | 568,727 | |
The following table presents the activity in our credit loss allowance for HTM debt securities (amounts in thousands):
| | | | | | | | | | | | |
| | | | | | | | Total HTM | ||||
| | | | Preferred | | Infrastructure | | Credit Loss | ||||
| | CMBS | | Interests | | Bonds | | Allowance | ||||
Six Months Ended June 30, 2020 | | | | | | | | | | | | |
Credit loss allowance at December 31, 2019 | | $ | — | | $ | — | | $ | — | | $ | — |
Cumulative effect of ASC 326 effective January 1, 2020: | | | | | | | | | | | | |
Beginning accumulated deficit charge | | | — | | | 1,114 | | | 179 | | | 1,293 |
Gross-up of PCD bond amortized cost basis | | | — | | | — | | | 2,837 | | | 2,837 |
Credit loss provision, net | | | — | | | 2,769 | | | (8) | | | 2,761 |
Charge-offs | | | — | | | — | | | — | | | — |
Recoveries | | | — | | | — | | | — | | | — |
Credit loss allowance at June 30, 2020 | | $ | — | | $ | 3,883 | | $ | 3,008 | | $ | 6,891 |
29
27
The table below summarizes the maturities of our HTM CMBS and our HTM preferred equity interests in limited liability companies that own commercial real estatedebt securities by type as of SeptemberJune 30, 20172020 (amounts in thousands):
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
| Preferred |
|
| |||||||||||||||
|
| CMBS |
| Interests |
| Total | |||||||||||||||
| | | | | | | | | | ||||||||||||
| | | | Preferred | | Infrastructure | | | |||||||||||||
| | CMBS | | Interests | | Bonds | | Total | |||||||||||||
Less than one year |
| $ | 129,282 |
| $ | — |
| $ | 129,282 |
| $ | 35,254 | | $ | — | | $ | 2,656 | | $ | 37,910 |
One to three years |
|
| 261,684 |
|
| — |
| 261,684 | | | 313,769 | | 140,515 | | — | | 454,284 | ||||
Three to five years |
|
| — |
|
| — |
| — | | | — | | 14,573 | | — | | 14,573 | ||||
Thereafter |
|
| — |
|
| 20,230 |
|
| 20,230 | |
| — | | | — | | | 37,656 | | | 37,656 |
Total |
| $ | 390,966 |
| $ | 20,230 |
| $ | 411,196 | | $ | 349,023 | | $ | 155,088 | | $ | 40,312 | | $ | 544,423 |
Equity Security, Fair Value Option
During 2012, we acquired 9,140,000 ordinary shares from a related-party in Starwood European Real Estate Finance Limited (“SEREF”), a debt fund that is externally managed by an affiliate of our Manager and is listed on the London Stock Exchange. We have elected to report the investment using the fair value option because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market, and also due to potential lags in reporting resulting from differences in the respective regulatory requirements. The fair value of the investment remeasured in USD was $13.5$9.8 million and $12.2$12.7 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. As of SeptemberJune 30, 2017,2020, our shares represent an approximate 2% interest in SEREF.
6. Properties
Our properties includeare held within the following portfolios:
Woodstar I Portfolio
The Woodstar I Portfolio is comprised of 32 affordable housing communities with 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas. During the year ended December 31, 2015, we acquired 18 of the 32 affordable housing communities of the Woodstar I Portfolio with the final 14 communities acquired during the year ended December 31, 2016. The Woodstar I Portfolio includes total gross properties and lease intangibles of $632.8 million and debt of $571.9 million as of June 30, 2020.
Woodstar II Portfolio
The Woodstar II Portfolio is comprised of 27 affordable housing communities with 6,109 units concentrated primarily in Central and South Florida. We acquired 8 of the 27 affordable housing communities in December 2017, with the final 19 communities acquired during the year ended December 31, 2018. The Woodstar II Portfolio includes total gross properties and lease intangibles of $607.0 million and debt of $437.0 million as of June 30, 2020.
Medical Office Portfolio
The Medical Office Portfolio is comprised of 34 medical office buildings acquired during the year ended December 31, 2016. These properties, which collectively comprise 1.9 million square feet, are geographically dispersed throughout the U.S. and primarily affiliated with major hospitals or located on or adjacent to major hospital campuses. The Medical Office Portfolio includes total gross properties and lease intangibles of $760.0 million and debt of $591.4 million as of June 30, 2020.
Master Lease Portfolio
The Master Lease Portfolio Medical Officeis comprised of 16 retail properties geographically dispersed throughout the U.S., with more than 50% of the portfolio, by carrying value, located in Florida, Texas and Minnesota. These properties, which we acquired in September 2017, collectively comprise 1.9 million square feet and were leased back to the seller under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations. The Master Lease Portfolio Woodstarincludes total gross properties of $343.8 million and debt of $192.5 million as of June 30, 2020.
28
Investing and Servicing Segment Property Portfolio
The Investing and Servicing Segment Property Portfolio (“REIS Equity Portfolio”) is comprised of 15 commercial real estate properties and 1 equity interest in an unconsolidated commercial real estate property which were acquired from CMBS trusts during the previous five years. The REIS Equity Portfolio includes total gross properties and Ireland Portfoliolease intangibles of $264.8 million and debt of $186.2 million as discussed in Note 3. of June 30, 2020.
The table below summarizes our properties held as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
| | | | | | | | |
|
| Depreciable Life |
| June 30, 2020 |
| December 31, 2019 | ||
Property Segment | | | | | | | | |
Land and land improvements | | 0 – 15 years | | $ | 484,678 | | $ | 484,397 |
Buildings and building improvements | | 5 – 45 years | | | 1,689,142 | | | 1,687,756 |
Furniture & fixtures | | 3 – 7 years | | | 55,767 | | | 52,567 |
Investing and Servicing Segment | | | | | | | | |
Land and land improvements | | 0 – 15 years | | | 50,817 | | | 54,052 |
Buildings and building improvements | | 3 – 40 years | | | 173,960 | | | 182,048 |
Furniture & fixtures | | 2 – 5 years | | | 2,363 | | | 2,139 |
Commercial and Residential Lending Segment (1) | | | | | | | | |
Land and land improvements | | 0 – 10 years | | | 11,415 | | | 11,386 |
Buildings and building improvements | | 10 – 23 years | | | 17,287 | | | 16,285 |
Properties, cost | | | | | 2,485,429 | | | 2,490,630 |
Less: accumulated depreciation | | | | | (261,106) | | | (224,190) |
Properties, net | | | | $ | 2,224,323 | | $ | 2,266,440 |
|
|
|
|
|
|
|
|
|
|
| Depreciable Life |
| September 30, 2017 |
| December 31, 2016 | ||
Property Segment |
|
|
|
|
|
|
|
|
Land and land improvements |
| 0 – 15 years |
| $ | 526,591 |
| $ | 385,860 |
Buildings and building improvements |
| 5 – 45 years |
|
| 1,755,511 |
|
| 1,291,531 |
Furniture & fixtures |
| 3 – 7 years |
|
| 26,038 |
|
| 23,035 |
Investing and Servicing Segment |
|
|
|
|
|
|
|
|
Land and land improvements |
| 0 – 15 years |
|
| 90,263 |
|
| 89,425 |
Buildings and building improvements |
| 3 – 40 years |
|
| 210,183 |
|
| 195,178 |
Furniture & fixtures |
| 2 – 5 years |
|
| 992 |
|
| 1,256 |
Properties, cost |
|
|
|
| 2,609,578 |
|
| 1,986,285 |
Less: accumulated depreciation |
|
|
|
| (88,236) |
|
| (41,565) |
Properties, net |
|
|
| $ | 2,521,342 |
| $ | 1,944,720 |
(1) | Represents properties acquired through loan foreclosure. |
During the three and ninesix months ended SeptemberJune 30, 2017,2020, we sold two and fivean operating propertiesproperty within the REIS Equity Portfolio for $26.0$24.1 million. In connection with this sale, we recognized a gain of $7.4 million and $44.6 million, respectively, which resulted in gains of $11.2 million and $16.4 million, respectively, recognized within gain on sale of investments and other assets in our condensed consolidated statementstatements of operations. During bothNaN operating properties were sold during the three and ninesix months ended SeptemberJune 30, 2017, $2.4 million of such gains were attributable to non-controlling interests. There were no properties sold during the nine months ended September 30, 2016.2019.
30
29
7. Investment in Unconsolidated Entities
The table below summarizes our investments in unconsolidated entities as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
| | | | | | | | |
| | Participation / | | Carrying value as of | ||||
|
| Ownership % (1) |
| June 30, 2020 |
| December 31, 2019 | ||
Equity method: | | | | | | | | |
Retail Fund | | 33% | | $ | — | | $ | — |
Equity interest in a natural gas power plant | | 10% | | | 24,744 | | | 25,862 |
Investor entity which owns equity in an online real estate company | | 50% | | | 10,746 | | | 9,473 |
Equity interests in commercial real estate | | 50% | | | 1,824 | | | 1,907 |
Equity interest in and advances to a residential mortgage originator (2) |
| N/A | |
| 11,989 | |
| 12,002 |
Various |
| 25% - 50% | |
| 8,182 | |
| 8,339 |
| | | |
| 57,485 | |
| 57,583 |
Other: | | | | | | | | |
Equity interest in a servicing and advisory business (3) | | 2% | | | 17,584 | |
| — |
Investment funds which own equity in a loan servicer and other real estate assets |
| 4% - 6% | |
| 9,225 | |
| 9,225 |
Various |
| 0% - 2% | |
| 20,619 | |
| 17,521 |
| | | |
| 47,428 | |
| 26,746 |
| | | | $ | 104,913 | | $ | 84,329 |
|
|
|
|
|
|
|
|
|
|
| Participation / |
| Carrying value as of | ||||
|
| Ownership % (1) |
| September 30, 2017 |
| December 31, 2016 | ||
Equity method: |
|
|
|
|
|
|
|
|
Retail Fund (see Note 15) |
| 33% |
| $ | 109,607 | (2) | $ | 124,977 |
Investor entity which owns equity in an online real estate company |
| 50% |
|
| 75,249 |
|
| 21,677 |
Equity interests in commercial real estate |
| 16% - 50% |
|
| 23,310 |
|
| 23,297 |
Various |
| 25% - 50% |
|
| 7,015 |
|
| 6,640 |
|
|
|
|
| 215,181 |
|
| 176,591 |
Cost method: |
|
|
|
|
|
|
|
|
Equity interest in a servicing and advisory business |
| 6% |
|
| 12,234 |
|
| 12,234 |
Investment funds which own equity in a loan servicer and other real estate assets |
| 4% - 6% |
|
| 9,225 |
|
| 9,225 |
Various |
| 0% - 3% |
|
| 6,810 |
|
| 6,555 |
|
|
|
|
| 28,269 |
|
| 28,014 |
|
|
|
| $ | 243,450 |
| $ | 204,605 |
(1) |
|
|
(2) |
|
(3) | During the |
During the three months ended September 30, 2017, the Retail Fund,We own a 33% equity interest in a fund that owns 4 regional shopping malls (the “Retail Fund”). The fund is an investment company thatwhich measures its assets at fair value on a recurring basis, reported unrealized decreases in the fair value of its real estate properties as a result of lender appraisals obtained by the Retail Fund.basis. We report our interest in the Retail Fund on a three-month lag basis at its liquidation value. As of December 31, 2019, we impaired the remainder of our investment based on our estimate of unrealized decreases in the fair value of the underlying real estate properties. Such decreases were recognized by the Retail Fund during the period included in the six months ended June 30, 2020.
As of June 30, 2020, the carrying value of our equity investment in a residential mortgage originator exceeded the underlying equity in net assets of such investee by $1.6 million. This difference is the result of the Company recording its investment in the investee at its acquisition date fair value, which resulted in a $33.7 million decrease to our investment. This amount wasincluded certain non-amortizing intangible assets not recognized withinby the investee. Should the Company determine these intangible assets held by the investee are impaired, the Company will recognize such impairment loss through earnings from unconsolidated entities in our condensed consolidated statementsstatement of operations, duringotherwise, such difference between the threecarrying value of our equity investment in the residential mortgage originator and nine months ended September 30, 2017.
In September 2017, the investor entity which ownsunderlying equity in an online real estate company sold approximately 88%the net assets of itsthe residential mortgage originator will continue to exist.
Other than our equity interest in the online real estate company. During the three and nine months ended September 30, 2017, we recognized $28.2 million and $53.9 million, respectively, of income from our investment in this investor entity as a result of the sale (see related income tax effect in Note 20)within earnings from unconsolidated entities in our condensed consolidated statements of operations. Subsequent to September 30, 2017, we received a pre-tax cash distribution of $66.0 million from the investor entity related to the sale.
Thereresidential mortgage originator, there were no0 differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of SeptemberJune 30, 2017.2020.
31
30
During the three and six months ended June 30, 2020, we did not become aware of (i) any observable price changes in our other investments accounted for under the fair value practicability exception, except as described above with respect to the servicing and advisory business, or (ii) any indicators of impairment.
8. GoodwillGoodwill and Intangibles
Goodwill
GoodwillInfrastructure Lending Segment
The Infrastructure Lending Segment’s goodwill of $119.4 million at Septemberboth June 30, 20172020 and December 31, 2016 represented2019 represents the excess of consideration transferred over the fair value of net assets acquired on September 19, 2018 and October 15, 2018. The goodwill recognized is attributable to value embedded in the acquired Infrastructure Lending Segment’s lending platform.
LNR Property LLC (“LNR”)
The Investing and Servicing Segment’s goodwill of $140.4 million at both June 30, 2020 and December 31, 2019 represents the excess of consideration transferred over the fair value of net assets of LNR Property LLC (“LNR”) acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes an internationala network of commercial real estate asset managers, work-out specialists, underwriters and administrative support professionals as well as proprietary historical performance data on commercial real estate assets.
Intangible Assets
Servicing Rights Intangibles
In connection with the LNR acquisition, we identified domestic and European servicing rights that existed at the purchase date, based upon the expected future cash flows of the associated servicing contracts. During the year ended December 31, 2016, we contributed our European servicing and advisory business to an unrelated entity in exchange for a non-controlling equity interest in that entity and therefore no longer have any European servicing rights.
At SeptemberAs of June 30, 20172020 and December 31, 2016,2019, the balance of the domestic servicing intangible was net of $26.6$34.9 million and $34.2$26.2 million, respectively, which was eliminated in consolidation pursuant to ASC 810 against VIE assets in connection with our consolidation of securitization VIEs. Before VIE consolidation, as of SeptemberJune 30, 20172020 and December 31, 2016,2019, the domestic servicing intangible had a balance of $60.4$48.8 million and $89.3$43.2 million, respectively, which represents our economic interest in this asset.
Lease Intangibles
In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and favorable lease intangible assets associated with certain non-cancelable operating leases of the acquired properties.
The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
| As of September 30, 2017 |
| As of December 31, 2016 | ||||||||||||||||||||||||||||||||
|
| Gross Carrying |
| Accumulated |
| Net Carrying |
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||||||||||||||||||||||
|
| Value |
| Amortization |
| Value |
| Value |
| Amortization |
| Value | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
| | As of June 30, 2020 | | As of December 31, 2019 | ||||||||||||||||||||||||||||||||
|
| Gross Carrying | | Accumulated |
| Net Carrying |
| Gross Carrying |
| Accumulated |
| Net Carrying | ||||||||||||||||||||||||
| | Value | | Amortization | | Value | | Value | | Amortization | | Value | ||||||||||||||||||||||||
Domestic servicing rights, at fair value |
| $ | 33,781 |
| $ | — |
| $ | 33,781 |
| $ | 55,082 |
| $ | — |
| $ | 55,082 | | $ | 13,955 | | $ | — | | $ | 13,955 | | $ | 16,917 | | $ | — | | $ | 16,917 |
In-place lease intangible assets |
|
| 181,636 |
|
| (59,308) |
|
| 122,328 |
|
| 175,409 |
|
| (38,532) |
|
| 136,877 | |
| 133,244 | |
| (87,917) | |
| 45,327 | |
| 135,293 | |
| (84,383) | |
| 50,910 |
Favorable lease intangible assets |
|
| 32,070 |
|
| (6,314) |
|
| 25,756 |
|
| 30,459 |
|
| (3,170) |
|
| 27,289 | | | 24,188 | | | (7,177) | | | 17,011 | | | 24,218 | | | (6,345) | | | 17,873 |
Total net intangible assets |
| $ | 247,487 |
| $ | (65,622) |
| $ | 181,865 |
| $ | 260,950 |
| $ | (41,702) |
| $ | 219,248 | | $ | 171,387 | | $ | (95,094) | | $ | 76,293 | | $ | 176,428 | | $ | (90,728) | | $ | 85,700 |
32
31
The following table summarizes the activity within intangible assets for the ninesix months ended SeptemberJune 30, 20172020 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Domestic |
| In-place Lease |
| Favorable Lease |
|
| ||||
|
| Servicing |
| Intangible |
| Intangible |
|
| ||||
|
| Rights |
| Assets |
| Assets |
| Total | ||||
Balance as of January 1, 2017 |
| $ | 55,082 |
| $ | 136,877 |
| $ | 27,289 |
| $ | 219,248 |
Acquisition of additional REIS Equity Portfolio properties |
|
| — |
|
| 3,810 |
|
| 462 |
|
| 4,272 |
Amortization |
|
| — |
|
| (20,098) |
|
| (2,940) |
|
| (23,038) |
Sales |
|
| — |
|
| (367) |
|
| (109) |
|
| (476) |
Foreign exchange gain |
|
| — |
|
| 3,908 |
|
| 1,044 |
|
| 4,952 |
Impairment (1) |
|
| — |
|
| (981) |
|
| (9) |
|
| (990) |
Changes in fair value due to changes in inputs and assumptions |
|
| (21,301) |
|
| — |
|
| — |
|
| (21,301) |
Measurement period adjustments |
|
| — |
|
| (821) |
|
| 19 |
|
| (802) |
Balance as of September 30, 2017 |
| $ | 33,781 |
| $ | 122,328 |
| $ | 25,756 |
| $ | 181,865 |
|
|
| | | | | | | | | | | | |
| | Domestic | | In-place Lease | | Favorable Lease | | | ||||
| | Servicing | | Intangible | | Intangible | | | ||||
|
| Rights |
| Assets |
| Assets | | Total | ||||
Balance as of January 1, 2020 | | $ | 16,917 | | $ | 50,910 | | $ | 17,873 | | $ | 85,700 |
Amortization | | | — | | | (5,413) | | | (862) | | | (6,275) |
Sales | | | — | | | (170) | | | — | | | (170) |
Changes in fair value due to changes in inputs and assumptions | | | (2,962) | | | — | | | — | | | (2,962) |
Balance as of June 30, 2020 | | $ | 13,955 | | $ | 45,327 | | $ | 17,011 | | $ | 76,293 |
The following table sets forth the estimated aggregate amortization of our in-place lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):
|
|
|
|
2017 (remainder of) |
| $ | 7,556 |
2018 |
|
| 27,711 |
2019 |
|
| 21,288 |
2020 |
|
| 15,908 |
2021 |
|
| 13,623 |
Thereafter |
|
| 61,998 |
Total |
| $ | 148,084 |
| | | |
2020 (remainder of) |
| $ | 5,407 |
2021 | |
| 9,653 |
2022 | |
| 7,871 |
2023 | |
| 6,115 |
2024 | |
| 4,722 |
Thereafter | |
| 28,570 |
Total | | $ | 62,338 |
33
32
9. Secured Borrowings
9.
The following table is a summary of our secured financing agreements in place as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Outstanding Balance at | ||||
| | Current | | Extended | | Weighted Average | | Pledged Asset | | Maximum | | June 30, | | December 31, | ||||
|
| Maturity |
| Maturity (a) |
| Pricing |
| Carrying Value |
| Facility Size |
| 2020 |
| 2019 | ||||
Repurchase Agreements: | | | | | | | | | | | | | | | | | | |
Commercial Loans | | Aug 2020 to Jan 2024 | (b) | May 2023 to Mar 2029 | (b) | (c) | | $ | 6,293,458 | | $ | 9,181,700 | (d) | $ | 4,024,642 | | $ | 3,640,620 |
Residential Loans | | Jun 2022 | | N/A | | LIBOR + 2.58% | | | 10,172 | | | 400,000 | | | 7,669 | | | 11,835 |
Infrastructure Loans | | Feb 2021 | | N/A | | LIBOR + 2.00% | | | 194,283 | | | 500,000 | | | 160,483 | | | 188,198 |
Conduit Loans | | Feb 2021 to Jun 2023 | | Feb 2022 to Jun 2024 | | LIBOR + 1.86% | | | 182,001 | | | 350,000 | | | 134,874 | | | 86,575 |
CMBS/RMBS | | Sep 2020 to Dec 2029 | (e) | Dec 2020 to Jun 2030 | (e) | (f) | | | 1,097,024 | | | 783,641 | | | 563,031 | (g) | | 682,229 |
Total Repurchase Agreements | | | | | | | | | 7,776,938 | | | 11,215,341 | | | 4,890,699 | | | 4,609,457 |
Other Secured Financing: | | | | | | | | | | | | | | | | | | |
Borrowing Base Facility | | Apr 2022 | | Apr 2024 | | LIBOR + 2.25% | | | 33,445 | | | 650,000 | (h) | | 29,333 | | | 198,955 |
Commercial Financing Facility | | Mar 2022 | | Mar 2029 | | GBP LIBOR + 1.75% | | | 91,214 | | | 73,650 | | | 73,650 | | | — |
Infrastructure Acquisition Facility | | Sep 2021 | | Sep 2022 | | (i) | | | 723,690 | | | 737,137 | | | 583,005 | | | 603,642 |
Infrastructure Financing Facilities | | Jul 2022 to Oct 2022 | | Oct 2024 to Jul 2027 | | LIBOR + 2.11% | | | 567,315 | | | 1,250,000 | | | 462,568 | | | 428,206 |
Property Mortgages - Fixed rate | | Nov 2024 to Aug 2052 | (j) | N/A | | 3.81% | | | 1,302,670 | | | 1,078,072 | | | 1,077,979 | | | 1,196,492 |
Property Mortgages - Variable rate | | Nov 2021 to Jul 2030 | | N/A | | LIBOR + 2.53% | | | 951,634 | | | 945,400 | | | 926,262 | | | 696,503 |
Term Loan and Revolver | | (k) | | N/A | | (k) | | | N/A | (k) | | 517,000 | | | 397,000 | | | 399,000 |
FHLB | | Feb 2021 | | N/A | | 1.99% | | | 690,341 | | | 2,000,000 | | | 481,500 | | | 867,870 |
Total Other Secured Financing | | | | | | | | | 4,360,309 | | | 7,251,259 | | | 4,031,297 | | | 4,390,668 |
| | | | | | | | $ | 12,137,247 | | $ | 18,466,600 | | | 8,921,996 | | | 9,000,125 |
Unamortized net discount | | | | | | | | | | (10,189) | | | (8,347) | |||||
Unamortized deferred financing costs | | | | | | | | | | (75,487) | | | (85,730) | |||||
| | | | | | | | | | | | | | $ | 8,836,320 | | $ | 8,906,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying Value at | ||||
|
| Current |
| Extended |
|
|
| Pledged Asset |
| Maximum |
| September 30, |
| December 31, | ||||
|
| Maturity |
| Maturity (a) |
| Pricing |
| Carrying Value |
| Facility Size |
| 2017 |
| 2016 | ||||
Lender 1 Repo 1 |
| (b) |
| (b) |
| LIBOR + 1.75% to 5.75% |
| $ | 1,534,069 |
| $ | 2,000,000 |
| $ | 1,170,141 |
| $ | 944,712 |
Lender 2 Repo 1 |
| Oct 2017 |
| Oct 2020 |
| LIBOR + 1.75% to 2.75% |
|
| 350,508 |
|
| 500,000 |
|
| 236,055 |
|
| 132,941 |
Lender 3 Repo 1 |
| May 2018 |
| May 2019 |
| LIBOR + 2.75% to 3.10% |
|
| 110,086 |
|
| 76,820 |
|
| 76,820 |
|
| 78,288 |
Lender 4 Repo 2 |
| Dec 2018 |
| Dec 2020 |
| LIBOR + 2.00% to 3.25% |
|
| 571,746 |
|
| 1,000,000 | (c) |
| 221,544 |
|
| 166,394 |
Lender 6 Repo 1 |
| Aug 2020 |
| N/A |
| LIBOR + 2.50% to 2.75% |
|
| 724,164 |
|
| 600,000 |
|
| 475,555 |
|
| 182,586 |
Lender 6 Repo 2 |
| Nov 2019 |
| Nov 2020 |
| GBP LIBOR + 2.75% |
|
| 173,516 |
|
| 121,280 |
|
| 121,280 |
|
| 121,509 |
Lender 9 Repo 1 |
| Dec 2017 |
| Dec 2018 |
| LIBOR + 1.65% |
|
| 340,620 |
|
| 254,447 |
|
| 254,447 |
|
| 283,575 |
Lender 10 Repo 1 |
| Mar 2020 |
| Mar 2022 |
| LIBOR + 2.00% to 2.75% |
|
| 169,733 |
|
| 140,000 |
|
| 136,800 |
|
| — |
Lender 11 Repo 1 |
| Jun 2019 |
| Jun 2020 |
| LIBOR + 2.75% |
|
| — |
|
| 200,000 |
|
| — |
|
| — |
Lender 11 Repo 2 |
| Sep 2018 |
| Sep 2022 |
| LIBOR + 2.25% to 2.75% |
|
| — |
|
| 250,000 |
|
| — |
|
| — |
Lender 7 Secured Financing |
| Jul 2018 |
| Jul 2019 |
| LIBOR + 2.75% | (d) |
| 46,800 |
|
| 650,000 | (e) |
| — |
|
| — |
Lender 8 Secured Financing |
| Aug 2019 |
| N/A |
| LIBOR + 4.00% |
|
| 30,147 |
|
| 75,000 |
|
| 18,226 |
|
| 43,555 |
Conduit Repo 2 |
| Nov 2017 |
| N/A |
| LIBOR + 2.25% |
|
| 53,751 |
|
| 150,000 |
|
| 40,842 |
|
| 14,944 |
Conduit Repo 3 |
| Feb 2018 |
| N/A |
| LIBOR + 2.10% |
|
| 136,254 |
|
| 150,000 |
|
| 103,678 |
|
| — |
Conduit Repo 4 |
| Oct 2017 |
| Oct 2020 |
| LIBOR + 2.25% |
|
| — |
|
| 100,000 |
|
| — |
|
| — |
MBS Repo 1 |
| (f) |
| (f) |
| LIBOR + 1.90% |
|
| 10,000 |
|
| 6,510 |
|
| 6,510 |
|
| 21,052 |
MBS Repo 2 |
| Jun 2020 |
| N/A |
| LIBOR/EURIBOR + 2.00% to 2.95% |
|
| 261,066 |
|
| 191,184 |
|
| 191,184 |
|
| 239,434 |
MBS Repo 3 |
| (g) |
| (g) |
| LIBOR + 1.32% to 1.95% |
|
| 384,546 |
|
| 254,668 |
|
| 254,668 |
|
| 285,209 |
MBS Repo 4 |
| (h) |
| N/A |
| LIBOR + 1.20% to 1.90% |
|
| 179,384 |
|
| 225,000 |
|
| 2,000 |
|
| 5,633 |
Investing and Servicing Segment Property Mortgages |
| Feb 2018 to Jun 2026 |
| N/A |
| Various |
|
| 245,094 |
|
| 201,238 |
|
| 177,217 |
|
| 164,611 |
Ireland Portfolio Mortgage |
| May 2020 |
| N/A |
| EURIBOR + 1.69% |
|
| 491,298 |
|
| 344,525 |
|
| 344,525 |
|
| 309,246 |
Woodstar Portfolio Mortgages |
| Nov 2025 to Oct 2026 |
| N/A |
| 3.72% to 3.97% |
|
| 369,519 |
|
| 276,748 |
|
| 276,748 |
|
| 276,748 |
Woodstar Portfolio Government Financing |
| Mar 2026 to Jun 2049 |
| N/A |
| 1.00% to 5.00% |
|
| 308,805 |
|
| 133,967 |
|
| 133,967 |
|
| 135,584 |
Medical Office Portfolio Mortgages |
| Dec 2021 to Feb 2022 |
| Dec 2023 to Feb 2024 |
| LIBOR + 2.50% | (i) |
| 741,304 |
|
| 527,124 |
|
| 497,613 |
|
| 491,197 |
Master Lease Portfolio Mortgages |
| Oct 2027 |
| N/A |
| 4.36% to 4.38% |
|
| 471,762 |
|
| 265,900 |
|
| 265,900 |
|
| — |
Term Loan A |
| Dec 2020 |
| Dec 2021 |
| LIBOR + 2.25% | (d) |
| 992,366 |
|
| 300,000 |
|
| 300,000 |
|
| 300,000 |
Revolving Secured Financing |
| Dec 2020 |
| Dec 2021 |
| LIBOR + 2.25% | (d) |
| — |
|
| 100,000 |
|
| — |
|
| — |
FHLB |
| Feb 2021 |
| N/A |
| LIBOR + 0.15% to 0.34% |
|
| 338,956 |
|
| 250,000 |
|
| 250,000 |
|
| — |
|
|
|
|
|
|
|
| $ | 9,035,494 |
| $ | 9,344,411 |
|
| 5,555,720 |
|
| 4,197,218 |
Unamortized net premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,579 |
|
| 2,640 |
Unamortized deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (43,604) |
|
| (45,732) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 5,514,695 |
| $ | 4,154,126 |
(a) | Subject to certain conditions as defined in the respective facility agreement. |
(b) |
|
(c) | Certain facilities with an outstanding balance of $965.9 million as of June 30, 2020 are indexed to GBP LIBOR and |
| The aggregate initial maximum facility size of |
|
|
34
| A facility with an outstanding balance of $175.9 million as of June 30, 2020 has a fixed annual interest rate of 3.50%. All other facilities are variable rate with a weighted average rate of LIBOR + 1.78%. |
(g) | Includes: (i) $175.9 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $41.3 million outstanding on one of our repurchase facilities that represents the 49% pro rata share owed by a non-controlling partner in a consolidated joint venture (see Note 14). |
(h) | The initial maximum facility size of |
(i) | Consists of an annual interest rate of the applicable currency benchmark index + 1.75%. The spread will increase 25 bps in September 2020. |
(j) | The weighted average maturity is 7.6 years as of June 30, 2020. |
(k) | Consists of: (i) a $397.0 million term loan facility that matures in July 2026 with an annual interest rate of LIBOR + 2.50%; and (ii) a $120.0 million revolving credit facility that matures in July 2024 with an annual |
33
|
|
|
|
|
|
|
|
In the normal course of business, the Company is in discussions with its lenders to extend or amend any financing facilities which contain near term expirations.
During the nine months ended September 30, 2017, we entered into two mortgage loans with maximum borrowings of $38.3 million to finance commercial real estate previously acquired by our Investing and Servicing Segment. As of September 30, 2017, these facilities carry a remaining weighted average term of 4.6 years with floating annual interest rates of LIBOR + 2.00%.
In February 2017,January 2020, we entered into a mortgage loan with maximum borrowings of $7.3 million as part of the Medical Office Portfolio Mortgages. This loanCMBS/RMBS repurchase facility to finance certain CMBS investments within a consolidated joint venture in which we hold a 51% ownership interest. The facility carries a five year initialrolling 12-month term which may reset quarterly with two 12 month extension optionsthe lender’s consent and an annual interest rate of three-month LIBOR + 2.50%1.35% to 1.85%. The facility’s maximum facility size is at the discretion of the lender.
In February 2020, we amended a Commercial Loans repurchase facility to increase available borrowings by $200.0 million to $1.8 billion.
In February 2020, we exercised an extension option on a Conduit Loans repurchase facility to extend the current maturity by one year with a one-year extension option.
In February 2020, we exercised an extension option on the Infrastructure Loans repurchase facility to extend the current maturity by one year.
In March 2017,2020, we amended an Infrastructure Financing Facility to increase available borrowings by $250.0 million to $750.0 million.
In March 2020, we entered into a $125.0 million repurchase facility (“Lender 10 Repo 1”)Commercial Financing Facility to finance certainnon-U.S. commercial loans held-for-investment. The facility carries a three yeartwo-year initial term with two3 one-year extension options and includes an annual interest rate of LIBOR + 2.00% to 2.75%. In May 2017, we upsized the maximum facility size to $140.0 million utilizing an available accordion feature.
In March 2017, we amended the Lender 3 Repo 1 facilityoption to extend the maturity from May 2017for each underlying asset for up to May 2018.
In June 2017, we entered into a $200.0 million repurchase facility (“Lender 11 Repo 1”) to finance certain mortgage loans held-for-sale. The facility carries a two year initial term with a one-year extension option and an initial annual interest rate of LIBOR + 2.75%.
In July 2017, we acquired a captive insurance entity that is a member of the Federal Home Loan Bank (“FHLB”) of Chicago. This membership, which expires in February 2021, provides usfour additional financing capacity from the FHLB of Chicago on qualifying collateral.years. The facility has an annual interest rate of GBP LIBOR + 0.15%1.75%. This facility shares up to 0.34% and expires in February 2021. As$500.0 million of September 30, 2017, the facility had outstanding$2.0 billion of maximum borrowings of $250.0 million.with a Commercial Loans repurchase facility.
In September 2017,June 2020, we amended a Residential Loans repurchase facility with a maximum facility size of $400.0 million to extend the current maturity from February 2021 to June 2022.
In June 2020, we amended a Commercial Loans repurchase facility and a Conduit Loans repurchase facility with an aggregate maximum facility size of $950.0 million to extend the current maturity from June 2022 to June 2023.
During the three months ended June 30, 2020, we entered into a $250.0 million repurchase facility (“Lender 11 Repo 2”) to finance certain loans held-for-investment. The facility carries a one year initial term with four one-year extension options and an annual interest rate of LIBOR + 2.25% to 2.75%.
In September 2017, we entered into two mortgage loans with total borrowings of $265.9$217.1 million (“Master Lease Portfolio Mortgages”) to finance the acquisition of the Master Leaserefinance our Woodstar I Portfolio. The loans carry ten yearten-year terms and fixedweighted average annual interest rates of 4.36% and 4.38%, respectively.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. We recognized a loss on extinguishment of debt of $2.2 million in our condensed consolidated statements of operations in connection with the repayment of the government sponsored mortgage loans.
In September 2017, we amended the Lender 6 Repo 1 facility to upsize available borrowings from $500.0 million to $600.0 million and extend the maturity from August 2019 to August 2020.
Our secured financing agreements contain certain financial tests and covenants. As of SeptemberJune 30, 2017,2020, we were in compliance with all such covenants.
35
The following table sets forth our five‑year principal repayments schedule for secured financings assuming no defaults and excluding loans transferred as secured borrowings. Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The amount reflected in each period includes principal repayments on our credit facilities that would be required if (i) we received the repayments that we expect to receive on the investments that have been pledged as collateral under the credit facilities, as applicable, and (ii) the credit facilities that are expected to have amounts outstanding at their current maturity dates are extended where extension options are available to us (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
| Repurchase |
| Other Secured |
|
| |||
|
| Agreements |
| Financing |
| Total | |||
2017 (remainder of) |
| $ | 781,261 |
| $ | 14,461 |
| $ | 795,722 |
2018 |
|
| 988,168 |
|
| 76,952 |
|
| 1,065,120 |
2019 |
|
| 395,715 |
|
| 1,355 |
|
| 397,070 |
2020 |
|
| 1,041,480 |
|
| 358,102 |
|
| 1,399,582 |
2021 |
|
| 2,289 |
|
| 565,815 |
|
| 568,104 |
Thereafter |
|
| 82,611 |
|
| 1,247,511 |
|
| 1,330,122 |
Total |
| $ | 3,291,524 |
| $ | 2,264,196 |
| $ | 5,555,720 |
For the three and nine months ended September 30, 2017, approximately $5.0 million and $14.4 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations. For the three and nine months ended September 30, 2016, approximately $3.9 million and $12.1 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.
The following table sets forth our outstanding balance of repurchase agreements related to the following asset collateral classes as of September 30, 2017 and December 31, 2016 (amounts in thousands):
|
|
|
|
|
|
|
Class of Collateral |
| September 30, 2017 |
| December 31, 2016 | ||
Loans held-for-investment |
| $ | 2,692,642 |
| $ | 1,890,925 |
Loans held-for-sale |
|
| 144,520 |
|
| 34,024 |
Investment securities |
|
| 454,362 |
|
| 551,328 |
|
| $ | 3,291,524 |
| $ | 2,476,277 |
We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the majority of our repurchase facilities, consisting of 72%76% of these agreements, do not permit valuation adjustments based on capital markets activity. Instead, margin calls on these facilities are limited to collateral-specific credit marks. To monitor credit risk associated with the performance and value of our loans and investments, our asset management team regularly reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. For the 24% of repurchase agreements containing margin call provisions for general capital markets activity, approximately 15%16% of these pertain to our loans held-for-sale, for which we manage credit risk through the purchase of credit index instruments. We further seek to manage risks associated with our repurchase agreements by matching the maturities and interest rate characteristics of our loans with the related repurchase agreements.agreement.
36
34
For the three and six months ended June 30, 2020, approximately $9.0 million and $17.8 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations. For the three and six months ended June 30, 2019, approximately $8.1 million and $16.8 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.
Collateralized Loan Obligations
In August 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2019-FL1. On the closing date, the CLO issued $1.1 billion principal amount of notes, of which $936.4 million was purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the six months ended June 30, 2020, we utilized the reinvestment feature, contributing $85.3 million of additional interests into the CLO.
The following table is a summary of our CLO as of June 30, 2020 and December 31, 2019 (amounts in thousands):
| | | | | | | | | | | | | |
| | | | Face | | Carrying | | Weighted | | | | ||
June 30, 2020 | | Count | | Amount | | Value | | Average Spread | | Maturity | | ||
Collateral assets | | 24 | | $ | 1,099,442 | | $ | 1,099,405 | | LIBOR + 3.66% | (a) | Jan 2024 | (b) |
Financing | | 1 | |
| 936,375 | | | 929,307 | | LIBOR + 1.64% | (c) | July 2038 | (d) |
| | | | | | �� | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | |
Collateral assets | | 20 | | $ | 1,073,504 | | $ | 1,073,504 | | LIBOR + 3.34% | (a) | Nov 2023 | (b) |
Financing | | 1 | |
| 936,375 | | | 928,060 | | LIBOR + 1.65% | (c) | July 2038 | (d) |
(a) | Represents the weighted-average coupon earned on variable rate loans during the respective year-to-date period. Of the loans financed by the CLO as of June 30, 2020, 9% earned fixed-rate weighted average interest of 6.84%. |
(b) | Represents the weighted-average maturity, assuming the extended contractual maturity of the collateral assets. |
(c) | Represents the weighted-average cost of financing incurred during the respective year-to-date period, inclusive of deferred issuance costs. |
(d) | Repayments of the CLO are tied to timing of the related collateral asset repayments. The term of the CLO financing obligation represents the legal final maturity date. |
We incurred $9.2 million of issuance costs in connection with the CLO, which are amortized on an effective yield basis over the estimated life of the CLO. For the three and six months ended June 30, 2020, approximately $0.6 million and $1.2 million, respectively, of amortization of deferred financing costs was included in interest expense on our condensed consolidated statements of operations. As of June 30, 2020 and December 31, 2019, our unamortized issuance costs were $7.1 million and $8.3 million, respectively.
The CLO is considered a VIE, for which we are deemed the primary beneficiary. We therefore consolidate the CLO. Refer to Note 14 for further discussion.
35
Maturities
Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The following table sets forth our principal repayments schedule for secured financings based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):
| | | | | | | | | | | | |
|
| Repurchase |
| Other Secured |
| | | | ||||
| | Agreements | | Financing | | CLO | | Total | ||||
2020 (remainder of) |
| $ | 220,863 |
| $ | 186,076 |
| $ | — | | $ | 406,939 |
2021 | |
| 566,939 | |
| 791,713 | | | — | |
| 1,358,652 |
2022 | |
| 1,269,283 | |
| 548,974 | | | — | |
| 1,818,257 |
2023 | |
| 1,026,265 | |
| 710,656 | | | — | |
| 1,736,921 |
2024 | |
| 1,312,435 | |
| 238,357 | | | — | |
| 1,550,792 |
Thereafter | |
| 494,914 | |
| 1,555,521 | | | 936,375 | (a) |
| 2,986,810 |
Total | | $ | 4,890,699 | | $ | 4,031,297 | | $ | 936,375 | | $ | 9,858,371 |
(a) | Assumes utilization of the reinvestment feature. |
The following table is a summary of our unsecured senior notes outstanding as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | Remaining | | | | | | | |
| | Coupon | | Effective | | Maturity | | Period of | | Carrying Value at | |||||
| | Rate | | Rate (1) | | Date | | Amortization | | June 30, 2020 | | December 31, 2019 | |||
2021 Senior Notes (February) | | 3.63 | % | 3.89 | % | 2/1/2021 |
| 0.6 | years |
| $ | 500,000 |
| $ | 500,000 |
2021 Senior Notes (December) | | 5.00 | % | 5.32 | % | 12/15/2021 | | 1.5 | years | | | 700,000 | | | 700,000 |
2023 Convertible Notes | | 4.38 | % | 4.86 | % | 4/1/2023 | | 2.8 | years | | | 250,000 | | | 250,000 |
2025 Senior Notes | | 4.75 | % | 5.04 | % | 3/15/2025 | | 4.7 | years | | | 500,000 | | | 500,000 |
Total principal amount | | | | | | | | | | | | 1,950,000 | | | 1,950,000 |
Unamortized discount—Convertible Notes | | | | | | | | | | | | (3,091) | | | (3,610) |
Unamortized discount—Senior Notes | | | | | | | | | | | | (9,922) | | | (12,144) |
Unamortized deferred financing costs | | | | | | | | | | |
| (4,427) | |
| (5,624) |
Carrying amount of debt components | | | | | | | | | | | $ | 1,932,560 | | $ | 1,928,622 |
Carrying amount of conversion option equity components recorded in additional paid-in capital for outstanding convertible notes | | | | | | | | | | | $ | 3,755 | | $ | 3,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Remaining |
|
|
|
|
|
| |
|
| Coupon |
| Effective |
| Maturity |
| Period of |
| Carrying Value at | |||||
|
| Rate |
| Rate (1) |
| Date |
| Amortization |
| September 30, 2017 |
| December 31, 2016 | |||
2017 Convertible Notes |
| 3.75 | % | 5.87 | % | 10/15/2017 |
| 0.0 | years |
| $ | 411,885 |
| $ | 411,885 |
2018 Convertible Notes |
| 4.55 | % | 6.10 | % | 3/1/2018 |
| 0.4 | years |
|
| 369,981 |
|
| 599,981 |
2019 Convertible Notes |
| 4.00 | % | 5.35 | % | 1/15/2019 |
| 1.3 | years |
|
| 341,363 |
|
| 341,363 |
2021 Senior Notes |
| 5.00 | % | 5.32 | % | 12/15/2021 |
| 4.2 | years |
|
| 700,000 |
|
| 700,000 |
2023 Convertible Notes |
| 4.38 | % | 4.86 | % | 4/1/2023 |
| 5.5 | years |
|
| 250,000 |
|
| — |
Total principal amount |
|
|
|
|
|
|
|
|
|
|
| 2,073,229 |
|
| 2,053,229 |
Unamortized discount—Convertible Notes |
|
|
|
|
|
|
|
|
|
|
| (14,268) |
|
| (26,135) |
Unamortized discount—Senior Notes |
|
|
|
|
|
|
|
|
|
|
| (8,420) |
|
| (9,728) |
Unamortized deferred financing costs |
|
|
|
|
|
|
|
|
|
|
| (6,018) |
|
| (5,822) |
Carrying amount of debt components |
|
|
|
|
|
|
|
|
|
| $ | 2,044,523 |
| $ | 2,011,544 |
Carrying amount of conversion option equity components recorded in additional paid-in capital |
|
|
|
|
|
|
|
|
|
| $ | 31,638 |
| $ | 45,988 |
(1) |
| Effective rate includes the effects of underwriter purchase discount and the adjustment for the conversion option on our |
Senior Notes Due 2021
On December 16, 2016, we issued $700.0 million of 5.00% Senior Notes due 2021 (the “2021 Notes”). The 2021 Notes mature on December 15, 2021. Prior to September 15, 2021, we may redeem some or all of the 2021 Notes at a price equal to 100% of the principal amount thereof, plus the applicable “make-whole” premium as of the applicable date of redemption. On and after September 15, 2021, we may redeem some or all of the 2021 Notes at a price equal to 100% of the principal amount thereof. In addition, we may redeem up to 35% of the 2021 Notes at the applicable redemption prices using the proceeds of certain equity offerings.
Convertible Senior Notes
On March 29, 2017, we issued $250.0 millionWe recognized interest expense of 4.375% Convertible Senior Notes due 2023 (the “2023 Notes”) resulting in gross proceeds of $247.5 million. At issuance, we allocated $243.7$3.1 million and $3.8$6.1 million during the three and six months ended June 30, 2020, respectively, from our unsecured Convertible Notes. We recognized interest expense of the carrying value of the 2023 Notes to its debt and equity components, respectively. Also on March 29, 2017, the proceeds from the issuance of the 2023 Notes were used to repurchase $230.0 million of the 4.55% Convertible Senior Notes due 2018 (the “2018 Notes”) for $250.7 million. The repurchase price was allocated between the fair value of the liability component and the fair value of the equity component of the 2018 Notes at the repurchase date. The portion of the repurchase price attributable to the equity component totaled $18.1$3.0 million and was recognized as a reduction of additional paid-in capital$6.2 million during the ninethree and six months ended SeptemberJune 30, 2017. The portion of the repurchase price attributable to the liability component exceeded the net carrying amount of the liability component by $5.9 million, which was recognized as a loss on extinguishment of debt in2019, respectively, from our condensed consolidated statement of operations during the nine months ended September 30, 2017. The repurchase of the 2018 Notes was not considered part of the repurchase program approved by our board of directors (refer to Note 16) and therefore does not reduce our available capacity forunsecured Convertible Notes.
37
36
future repurchases under the repurchase program. There were no repurchases of Convertible Notes during the nine months ended September 30, 2016.
On October 8, 2014, we issued $431.3 million of 3.75% Convertible Senior Notes due 2017 (the “2017 Notes”). On February 15, 2013, we issued $600.0 million of 4.55% Convertible Senior Notes due 2018 (the “2018 Notes”). On July 3, 2013, we issued $460.0 million of 4.00% Convertible Senior Notes due 2019 (the “2019 Notes”).
The following table details the conversion attributes of our Convertible Notes outstanding as of SeptemberJune 30, 2017 (amounts in thousands, except rates):2020:
| | | | | |
| | June 30, 2020 | |||
| | Conversion | | Conversion | |
| | Rate (1) | | Price (2) | |
2023 Convertible Notes | | 38.5959 |
| $ | 25.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| Conversion Spread Value - Shares (3) | |||||||||
|
| Conversion |
| Conversion |
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | |||||
|
| Rate (1) |
| Price (2) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | |
2017 Notes |
| 41.7397 |
| $ | 23.96 |
| — |
| — |
| — |
| — |
2018 Notes |
| 48.0666 |
| $ | 20.80 |
| 742 |
| 1,595 |
| 733 |
| 1,743 |
2019 Notes |
| 50.7031 |
| $ | 19.72 |
| 1,571 |
| 1,850 |
| 1,551 |
| 2,023 |
2023 Notes |
| 38.5959 |
| $ | 25.91 |
| — |
| — |
| — |
| — |
|
|
|
|
|
|
| 2,313 |
| 3,445 |
| 2,284 |
| 3,766 |
(1) |
| The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of Convertible Notes converted, as adjusted in accordance with the indentures governing the Convertible Notes (including the applicable supplemental indentures) |
(2) |
| As of |
|
|
The if-converted valuesvalue of the 20182023 Convertible Notes and 2019 Notes exceededwas less than their principal amountsamount by $16.4$105.7 million and $34.6 million, respectively, at SeptemberJune 30, 20172020 as the closing market priceof the Company’s common stock of $21.72 per share exceeded the implicit conversion prices of $20.80 and $19.72 per share, respectively. However, the if‑converted values of the 2017 Notes and 2023 Notes were less than their principal amounts by $38.5 million and $40.4 million, respectively, at September 30, 2017 as the closing market price of the Company’s common stock$14.96 was less than the implicit conversion pricesprice of $23.96 and $25.91 per share, respectively.
share. The Company has asserted its intent and ability to settleif-converted value of the principal amount of the 2023 Convertible Notes in cash. As such, only the conversion spread value, if any, is included in the computationwas $144.3 million as of diluted EPS. June 30, 2020.
Conditions for Conversion
Prior to July 15, 2018 for the 2019 Notes and October 1, 2022 for the 2023 Notes, those Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is at least 110%, in the case of the 2023 Notes, or 130%, in the case of the 2019 Notes, of the conversion price of the respective Convertible Notes for at least 20 out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10% or (4) certain other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.
38
On or after July 15, 2018, in the case of the 2019 Notes, and October 1, 2022, in the case of the 2023 Notes, holders may convert each of their Convertible Notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date. On September 1, 2017, the 2018 Notes entered the open conversion period and may be converted at any time through their maturity date of March 1, 2018.
In October 2017, we repaid the full principal amount of the 2017 Notes in cash upon their maturity.
11. Loan Securitization/Sale Activities
As described below, we regularly sell loans and notes under various strategies. We evaluate such sales as to whether they meet the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transfer of control.
Loan Securitizations
Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in part by these assets, as well as other assets transferred to the VIE.VIE by third parties. Within the Commercial and Residential Lending Segment, we acquire residential mortgage loans with the intent to sell these mortgage loans to VIEs for the purpose of securitization. These VIEs then issue RMBS that are collateralized by these assets. In certain instances, we retain a subordinatedan interest in the CMBS or RMBS VIE andand/or serve as special servicer or servicing administrator for the VIE. In these circumstances, we generally consolidate the VIE into which the loans were sold. The following summarizes the fair valueface amount and par valueproceeds of commercial and residential loans sold from our conduit platform, as well as the amount of sale proceeds used in part to repay the outstanding balance of the repurchase agreements associated with these loanssecuritized for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands):
| | | | | | | | | | | | |
| | Commercial Loans | | Residential Loans | ||||||||
|
| Face Amount |
| Proceeds |
| Face Amount |
| Proceeds | ||||
For the Three Months Ended June 30, | | | | | | | | | | | | |
2020 | | $ | — | | $ | — | | $ | 583,501 | | $ | 589,693 |
2019 | |
| 345,221 | | | 365,377 | |
| — | | | — |
For the Six Months Ended June 30, | | | | | | | | | | | | |
2020 | | $ | 335,835 | | $ | 352,393 | | $ | 964,780 | | $ | 988,440 |
2019 | |
| 524,632 | |
| 552,218 | |
| 340,211 | |
| 352,012 |
The securitization of these commercial and residential loans does not result in a discrete gain or loss since they are carried under the fair value option.
Our securitizations have each been structured as bankruptcy-remote entities whose assets are not intended to be available to the creditors of any other party.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
| For the Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Fair value of loans sold |
| $ | 517,351 |
| $ | 648,179 |
| $ | 987,828 |
| $ | 1,123,512 |
Par value of loans sold |
|
| 498,022 |
|
| 599,997 |
|
| 938,879 |
|
| 1,056,859 |
Repayment of repurchase agreements |
|
| 376,687 |
|
| 366,268 |
|
| 709,666 |
|
| 709,049 |
37
Commercial and Residential Loan Sales
Within the Commercial and Residential Lending Segment, we originate or acquire commercial mortgage loans, and then subsequently sellselling all or a portion which can be in various forms including first mortgages, A-Notes, senior participations and mezzanine loans.thereof. Typically, our motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will retain and hold for investment. InWe also may sell certain instances, we continueof our previously-acquired residential loans to service the loan following its sale.third parties outside a securitization. The following table summarizes our loans sold and loans transferred as secured borrowings by the Commercial and Residential Lending Segment, net of expenses (amounts in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Loan Transfers Accounted for as Sales | ||||||||||
| | Commercial | | Residential | ||||||||
|
| Face Amount (1) |
| Proceeds (1) |
| Face Amount |
| Proceeds | ||||
For the Three Months Ended June 30, | | | | | | | | | | | | |
2020 | | $ | 399,132 | | $ | 396,078 | | $ | — | | $ | — |
2019 | |
| 102,681 | | | 102,141 | | | 1,635 | | | 1,653 |
For the Six Months Ended June 30, | | | | | | | | | | | | |
2020 | | $ | 399,132 | | $ | 396,078 | | $ | 550 | | $ | 604 |
2019 | |
| 501,422 | | | 498,451 | | | 23,842 | | | 24,517 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loan Transfers | ||||
|
| Loan Transfers Accounted |
| Accounted for as Secured | ||||||||
|
| for as Sales |
| Borrowings | ||||||||
|
| Face Amount |
| Proceeds |
| Face Amount |
| Proceeds | ||||
For the Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| $ | — |
| $ | — |
| $ | 75,000 |
| $ | 74,200 |
2016 |
|
| 116,000 |
|
| 115,157 |
|
| — |
|
| — |
For the Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
|
2017 |
| $ | 38,750 |
| $ | 37,079 |
| $ | 75,000 |
| $ | 74,200 |
2016 |
|
| 238,514 |
|
| 236,433 |
|
| — |
|
| — |
(1) | During both the three and six months ended June 30, 2020, we sold $230.9 million and $168.2 million of senior interests in first mortgage loans and whole loan interests, respectively, for proceeds of $224.1 million and $172.0 million, respectively. During the three and six months ended June 30, 2019, all sales were of senior interests in first mortgage loans. |
During both the three and ninesix months ended SeptemberJune 30, 2017 and 2016, gains (losses)2020, losses recognized by the Commercial and Residential Lending Segment on sales of commercial loans were $1.0 million. During the three and six months ended June 30, 2019, gains recognized by the Commercial and Residential Lending Segment on sales of commercial loans were $0.2 million and $3.0 million, respectively. The sale of residential loans does not material.result in a discrete gain or loss since they are carried under the fair value option.
Infrastructure Loan Sales
During the six months ended June 30, 2020, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of $38.7 million for proceeds of $38.4 million, recognizing gains of $0.3 million. There were no sales of loans by the Infrastructure Lending Segment during the three months ended June 30, 2020. During the three and six months ended June 30, 2019, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of $176.5 million and $356.8 million, respectively, for proceeds of $173.6 million and $346.3 million, respectively, recognizing gains of $2.3 million and $3.1 million, respectively. In connection with these sales, we sold an interest rate swap guarantee for cash payment of $3.1 million and recognized a decrease in fair value of $2.7 million within loss on derivative financial instruments, net in our condensed consolidated statements of operations during the three and six months ended June 30, 2019. Refer to Note 12 for further discussion of our interest rate swap guarantees.
39
12. Derivatives and Hedging Activity
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. Refer to Note 13 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.
Designated Hedges
In connection with our repurchase agreements, we have entered into four outstanding interest rate swaps that have been designated as cash flow hedges ofThe Company does not generally elect to apply the interest rate risk associated with forecasted interest payments.hedge accounting designation to its hedging instruments. As of SeptemberJune 30, 2017,2020 and December 31, 2019, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $40.0 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.64% to 1.52% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges of interest rate risk have maturities ranging from November 2017 to May 2021.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2017 and 2016, weCompany did not recognizehave any hedge ineffectiveness in earnings.designated hedges.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next 12 months, we estimate that an immaterial amount will be reclassified as a decrease to interest expenses. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period
38
Non-designated Hedges and Derivatives
We have entered into a seriesthe following types of forward contracts whereby we agreed to sell an amount of foreign currency for an agreed upon amount of USD at various dates through July 2020. We entered into these forward contracts to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to certain foreign denominated loan investmentsnon-designated hedges and properties.derivatives:
● | Foreign exchange (“Fx”) forwards whereby we agree to buy or sell a specified amount of foreign currency for a specified amount of USD at a future date, economically fixing the USD amounts of foreign denominated cash flows we expect to receive or pay related to certain foreign denominated loan investments and properties; |
● | Interest rate contracts which hedge a portion of our exposure to changes in interest rates; |
● | Credit index instruments which hedge a portion of our exposure to the credit risk of our commercial loans held-for-sale; and |
● | Interest rate swap guarantees whereby we guarantee the interest rate swap obligations of certain Infrastructure Lending borrowers. Our interest rate swap guarantees were assumed in connection with the acquisition of the Infrastructure Lending Segment. |
The following table summarizes our non-designated foreign exchange (“Fx”) forwards, interest rate contracts, and credit index instrumentsderivatives as of SeptemberJune 30, 20172020 (notional amounts in thousands):
|
|
|
|
|
|
|
|
|
Type of Derivative |
| Number of Contracts |
| Aggregate Notional Amount |
| Notional Currency |
| Maturity |
Fx contracts – Sell Euros ("EUR") (1) |
| 44 |
| 283,394 |
| EUR |
| November 2017 – June 2020 |
Fx contracts – Sell Pounds Sterling ("GBP") |
| 129 |
| 263,925 |
| GBP |
| October 2017 – July 2020 |
Interest rate swaps – Paying fixed rates |
| 30 |
| 815,730 |
| USD |
| April 2019 – September 2027 |
Interest rate caps |
| 2 |
| 294,000 |
| EUR |
| May 2020 |
Interest rate caps |
| 8 |
| 68,194 |
| USD |
| June 2018 – October 2021 |
Credit index instruments |
| 10 |
| 59,000 |
| USD |
| September 2058 – November 2059 |
Total |
| 223 |
|
|
|
|
|
|
|
|
| | | | | | | | |
Type of Derivative |
| Number of Contracts |
| Aggregate Notional Amount |
| Notional Currency |
| Maturity |
Fx contracts – Buy Euros ("EUR") | | 1 | | 1,915 | | EUR | | November 2022 |
Fx contracts – Sell EUR | | 277 | | 228,011 | | EUR | | August 2020 – November 2025 |
Fx contracts – Sell Pounds Sterling ("GBP") | | 97 | | 315,411 | | GBP | | July 2020 – December 2023 |
Fx contracts – Sell Australian dollar ("AUD") | | 10 | | 85,592 | | AUD | | August 2021 – November 2021 |
Interest rate swaps – Paying fixed rates | | 45 | | 1,950,878 | | USD | | August 2022 – March 2030 |
Interest rate swaps – Receiving fixed rates | | 2 | | 970,000 | | USD | | January 2021- March 2025 |
Interest rate caps | | 23 | | 959,706 | | USD | | September 2020 – April 2025 |
Credit index instruments | | 4 | | 69,000 | | USD | | September 2058 – August 2061 |
Interest rate swap guarantees | | 6 | | 388,783 | | USD | | March 2022 – June 2025 |
Total | | 465 | | | | | | |
40
The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
| | | | | | | | | | | | |
| | Fair Value of Derivatives | | Fair Value of Derivatives | ||||||||
| | in an Asset Position (1) as of | | in a Liability Position (2) as of | ||||||||
| | June 30, | | December 31, | | June 30, | | December 31, | ||||
|
| 2020 | | 2019 | | 2020 | | 2019 | ||||
Interest rate contracts | | $ | 42,491 | | $ | 14,385 | | $ | 23 | | $ | — |
Interest rate swap guarantees | | | — | | | — | | | 1,219 | | | 614 |
Foreign exchange contracts | |
| 47,875 | |
| 14,558 | |
| 2,638 | |
| 7,834 |
Credit index instruments | |
| 539 | |
| — | |
| — | |
| 292 |
Total derivatives | | $ | 90,905 | | $ | 28,943 | | $ | 3,880 | | $ | 8,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair Value of Derivatives |
| Fair Value of Derivatives | ||||||||
|
| in an Asset Position (1) as of |
| in a Liability Position (2) as of | ||||||||
|
| September 30, |
| December 31, |
| September 30, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
| $ | 33 |
| $ | 30 |
| $ | 2 |
| $ | 56 |
Total derivatives designated as hedging instruments |
|
| 33 |
|
| 30 |
|
| 2 |
|
| 56 |
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
| 23,961 |
|
| 26,591 |
|
| — |
|
| 3,484 |
Foreign exchange contracts |
|
| 13,644 |
|
| 62,295 |
|
| 22,888 |
|
| 364 |
Credit index instruments |
|
| 655 |
|
| 445 |
|
| — |
|
| — |
Total derivatives not designated as hedging instruments |
|
| 38,260 |
|
| 89,331 |
|
| 22,888 |
|
| 3,848 |
Total derivatives |
| $ | 38,293 |
| $ | 89,361 |
| $ | 22,890 |
| $ | 3,904 |
(1) |
| Classified as derivative assets in our condensed consolidated balance sheets. |
(2) |
| Classified as derivative liabilities in our condensed consolidated balance sheets. |
39
The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations and of comprehensive income for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gain (Loss) |
|
|
|
|
| |
|
| Gain (Loss) |
| Reclassified |
| Gain (Loss) |
|
| |||
|
| Recognized |
| from AOCI |
| Recognized |
|
| |||
Derivatives Designated as Hedging Instruments |
| in OCI |
| into Income |
| in Income |
| Location of Gain (Loss) | |||
For the Three Months Ended September 30, |
| (effective portion) |
| (effective portion) |
| (ineffective portion) |
| Recognized in Income | |||
2017 |
| $ | (3) |
| $ | 19 |
| $ | — |
| Interest expense |
2016 |
| $ | 107 |
| $ | (78) |
| $ | — |
| Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
2017 |
| $ | 45 |
| $ | (11) |
| $ | — |
| Interest expense |
2016 |
| $ | (397) |
| $ | (261) |
| $ | — |
| Interest expense |
| | | | | | | | | | | | | | |
| | | | Amount of Gain (Loss) | | Amount of Gain (Loss) | ||||||||
| | | | Recognized in Income for the | | Recognized in Income for the | ||||||||
Derivatives Not Designated | | Location of Gain (Loss) | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
as Hedging Instruments |
| Recognized in Income |
| 2020 | | 2019 | | 2020 | | 2019 | ||||
Interest rate contracts |
| Loss on derivative financial instruments | | $ | (7,263) | | $ | (10,077) | | $ | (52,388) | | $ | (13,835) |
Interest rate swap guarantees | | Loss on derivative financial instruments | | | 70 | | | (2,990) | | | (605) | | | (3,171) |
Foreign exchange contracts |
| Loss on derivative financial instruments | |
| (7,107) | |
| 13,245 | |
| 46,158 | |
| 15,689 |
Credit index instruments |
| Loss on derivative financial instruments | |
| (1,798) | |
| (210) | |
| 447 | |
| (922) |
| | | | $ | (16,098) | | $ | (32) | | $ | (6,388) | | $ | (2,239) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) |
| Amount of Gain (Loss) | ||||||||
|
|
|
| Recognized in Income for the |
| Recognized in Income for the | ||||||||
Derivatives Not Designated |
| Location of Gain (Loss) |
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
as Hedging Instruments |
| Recognized in Income |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Interest rate contracts |
| Loss on derivative financial instruments |
| $ | (3,836) |
| $ | (626) |
| $ | (10,190) |
| $ | (25,899) |
Foreign exchange contracts |
| Loss on derivative financial instruments |
|
| (19,650) |
|
| (189) |
|
| (54,814) |
|
| 21,160 |
Credit index instruments |
| Loss on derivative financial instruments |
|
| (738) |
|
| (1,513) |
|
| (1,155) |
|
| (2,054) |
|
|
|
| $ | (24,224) |
| $ | (2,328) |
| $ | (66,159) |
| $ | (6,793) |
41
13. Offsetting Assets and Liabilities
The following tables present the potential effects of netting arrangements on our financial position for financial assets and liabilities within the scope of ASC 210-20, Balance Sheet—Offsetting, which for us are derivative assets and liabilities as well as repurchase agreement liabilities (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| (iv) |
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not |
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Offset in the Statement |
|
|
| ||||||||||||||||||||||
|
|
|
|
| (ii) |
| (iii) = (i) - (ii) |
| of Financial Position |
|
|
| ||||||||||||||||||||||||
|
|
|
|
| Gross Amounts |
| Net Amounts |
|
|
|
| Cash |
|
|
| |||||||||||||||||||||
|
| (i) |
| Offset in the |
| Presented in |
|
|
|
| Collateral |
|
|
| ||||||||||||||||||||||
|
| Gross Amounts |
| Statement of |
| the Statement of |
| Financial |
| Received / |
| (v) = (iii) - (iv) | ||||||||||||||||||||||||
|
| Recognized |
| Financial Position |
| Financial Position |
| Instruments |
| Pledged |
| Net Amount | ||||||||||||||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
| | | | | | | | | | | (iv) | | | | ||||||||||||||||||||||
| | | | | | | | | | | Gross Amounts Not | | | | ||||||||||||||||||||||
| | | | | | | | | | | Offset in the Statement | | | | ||||||||||||||||||||||
| | | | | (ii) | | (iii) = (i) - (ii) | | of Financial Position | | | | ||||||||||||||||||||||||
|
| | | | Gross Amounts |
| Net Amounts |
| | |
| Cash |
| | | |||||||||||||||||||||
| | (i) | | Offset in the | | Presented in | | | | | Collateral | | | | ||||||||||||||||||||||
| | Gross Amounts | | Statement of | | the Statement of | | Financial | | Received / | | (v) = (iii) - (iv) | ||||||||||||||||||||||||
| | Recognized | | Financial Position | | Financial Position | | Instruments | | Pledged | | Net Amount | ||||||||||||||||||||||||
As of June 30, 2020 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Derivative assets |
| $ | 38,293 |
| $ | — |
| $ | 38,293 |
| $ | 13,677 |
| $ | — |
| $ | 24,616 | | $ | 90,905 | | $ | — | | $ | 90,905 | | $ | 2,638 | | $ | 42,096 | | $ | 46,171 |
Derivative liabilities |
| $ | 22,890 |
| $ | — |
| $ | 22,890 |
| $ | 13,677 |
| $ | 6,859 |
| $ | 2,354 | | $ | 3,880 | | $ | — | | $ | 3,880 | | $ | 2,638 | | $ | 23 | | $ | 1,219 |
Repurchase agreements |
|
| 3,291,524 |
|
| — |
|
| 3,291,524 |
|
| 3,291,524 |
|
| — |
|
| — | |
| 4,890,699 | |
| — | |
| 4,890,699 | |
| 4,890,699 | |
| — | |
| — |
|
| $ | 3,314,414 |
| $ | — |
| $ | 3,314,414 |
| $ | 3,305,201 |
| $ | 6,859 |
| $ | 2,354 | ||||||||||||||||||
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | $ | 4,894,579 | | $ | — | | $ | 4,894,579 | | $ | 4,893,337 | | $ | 23 | | $ | 1,219 | ||||||||||||||||||
As of December 31, 2019 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Derivative assets |
| $ | 89,361 |
| $ | — |
| $ | 89,361 |
| $ | 491 |
| $ | — |
| $ | 88,870 | | $ | 28,943 | | $ | — | | $ | 28,943 | | $ | 5,312 | | $ | 14,208 | | $ | 9,423 |
Derivative liabilities |
| $ | 3,904 |
| $ | — |
| $ | 3,904 |
| $ | 491 |
| $ | 3,413 |
| $ | — | | $ | 8,740 | | $ | — | | $ | 8,740 | | $ | 5,312 | | $ | 292 | | $ | 3,136 |
Repurchase agreements |
|
| 2,476,277 |
|
| — |
|
| 2,476,277 |
|
| 2,476,277 |
|
| — |
|
| — | |
| 4,609,457 | |
| — | |
| 4,609,457 | |
| 4,609,457 | |
| — | |
| — |
|
| $ | 2,480,181 |
| $ | — |
| $ | 2,480,181 |
| $ | 2,476,768 |
| $ | 3,413 |
| $ | — | ||||||||||||||||||
| | $ | 4,618,197 | | $ | — | | $ | 4,618,197 | | $ | 4,614,769 | | $ | 292 | | $ | 3,136 |
14. Variable Interest Entities
Investment Securities
As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation, including our investments in CMBS, RMBS and our retained interests in securitization transactions we initiated, all of which are generally considered to be variable interests in VIEs.
Securitization VIEs consolidated in accordance with ASC 810 are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The assets and other instruments held by these securitization entities are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated entities, nor to us as the primary beneficiary. The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, an allocable portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.
40
VIEs in which we are the Primary Beneficiary
The inclusion of the assets and liabilities of securitization VIEs in which we are deemed the primary beneficiary has no economic effect on us. Our exposure to the obligations of securitization VIEs is generally limited to our investment in these entities. We are not obligated to provide, nor have we provided, any financial support for any of these consolidated structures.
During the year ended December 31, 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, which is considered to be a VIE. We are the primary beneficiary of, and therefore consolidate, the CLO in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager that most significantly impact the CLO’s economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the CLO that could be potentially significant through the subordinate interests we own.
The following table details the assets and liabilities of our consolidated CLO as of June 30, 2020 and December 31, 2019 (amounts in thousands):
| | | | | | |
| | June 30, 2020 | | December 31, 2019 | ||
Assets: | | | | | | |
Loans held-for-investment | | $ | 1,099,405 | |
| 1,073,504 |
Accrued interest receivable | |
| 1,875 | |
| 3,129 |
Other assets | | | 558 | | | 26,496 |
Total Assets | | $ | 1,101,838 | | $ | 1,103,129 |
Liabilities | | | | | | |
Accounts payable, accrued expenses and other liabilities | | $ | 635 | | $ | 1,362 |
Collateralized loan obligations, net | |
| 929,307 | |
| 928,060 |
Total Liabilities | | $ | 929,942 | | $ | 929,422 |
Assets held by this CLO are restricted and can be used only to settle obligations of the CLO, including the subordinate interests owned by us. The liabilities of this CLO are non-recourse to us and can only be satisfied from the assets of the CLO.
We also hold controlling interests in certain other non-securitization entities that are considered VIEs,VIEs. SPT Dolphin Intermediate LLC (“SPT Dolphin”), the entity which were established to facilitateholds the purchase of certain properties acquired withWoodstar II Portfolio, is a VIE because the third party minority interest partners.holders do not carry kick-out rights or substantive participating rights. We arewere deemed to be the primary beneficiariesbeneficiary of these VIEs asthe VIE because we possess both the power to direct the activities of the VIEsVIE that most significantly
42
impact theirits economic performance and holda significant economic interests. These VIEsinterest in the entity. This VIE had total assets of $167.3$677.1 million and liabilities of $114.3$445.9 million as of SeptemberJune 30, 2017.2020.
In December 2019, we entered into a newly-formed joint venture (the “CMBS JV”) within our Investing and Servicing Segment, which is considered a VIE because the third party interest holder does not carry kick-out rights or substantive participating rights. We hold a 51% ownership interest and are deemed the primary beneficiary of the CMBS JV. This VIE had total assets of $330.3 million and liabilities of $85.2 million as of June 30, 2020. Refer to Note 16 for further discussion.
In total, our other consolidated non-securitization VIEs had total assets of $1.1 billion and liabilities of $585.1 million as of June 30, 2020.
VIEs in which we are not the Primary Beneficiary
In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not appointed, or do not serve as, special servicer or servicing administrator or (ii) an unrelated third party has the rights to unilaterally remove us as special servicer without cause. In these instances, we do not have the power to direct activities that most significantly impact the VIE’s economic performance. In other cases, the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant. For these structures, we are not deemed to be the primary beneficiary of the VIE, and we do not consolidate these VIEs.
41
As of SeptemberJune 30, 2017, two2020, 4 of our CDOcollateralized debt obligation (“CDO”) structures within our Investing and Servicing Segment were in default one ofor imminent default, which, entered default during the nine months ended September 30, 2017. Pursuantpursuant to the underlying indentures, changes the rights of the variable interest holders change uponholders. Upon default of a CDO, such that the trustee or senior note holders are allowed to exercise certain rights, including liquidation of the collateral, which at that time, is the activity which would most significantly impact the CDO’s economic performance. Further, when the CDO is in default, the collateral administrator no longer has the option to purchase securities from the CDO. In cases where the CDO is in default and we do not have the ability to exercise rights which would most significantly impact the CDO’s economic performance, we do not consolidate the VIE. During the nine months ended September 30, 2017, we deconsolidated the CDO that went into default, resulting in a reduction to each of VIE assets and VIE liabilities of $467.1 million. The carrying value of our investment in this CDO was zero at the time of deconsolidation and at September 30, 2017. As of SeptemberJune 30, 2017, neither2020, NaN of these CDO structures were consolidated.
As noted above, we are not obligated to provide, nor have we provided, any financial support for any of our securitization VIEs, whether or not we are deemed to be the primary beneficiary. As such, the risk associated with our involvement in these VIEs is limited to the carrying value of our investment in the entity. As of SeptemberJune 30, 2017,2020, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $23.8$23.5 million on a fair value basis.
As of SeptemberJune 30, 2017,2020, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances, excluding the notional value of $5.3interest-only securities, of $4.1 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.
We also hold passive non-controlling interests in certain unconsolidated entities that are considered VIEs.We are not the primary beneficiaries of these VIEs as we do not possess the power to direct the activities of the VIEs that most significantly impact their economic performance and therefore report our interests, which totaled $118.8$21.2 million as of SeptemberJune 30, 2017,2020, within investment in unconsolidated entities on our condensed consolidated balance sheet. Our maximum risk of loss is limited to our carrying value of the investments.
15. Related-Party Transactions
Management Agreement
We are party to a management agreement (the “Management Agreement”) with our Manager. Under the Management Agreement, our Manager, subject to the oversight of our board of directors, is required to manage our day to day activities, for which our Manager receives a base management fee and is eligible for an incentive fee and stock awards. Our Manager’s personnel perform certain due diligence, legal, management and other services that outside professionals or consultants would otherwise perform. As such, in accordance with the terms of our Management Agreement, our Manager is paid or reimbursed for the documented costs of performing such tasks, provided that such costs and reimbursements are in amounts no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.
43
Base Management Fee. For the three months ended SeptemberJune 30, 20172020 and 2016,2019, approximately $16.9$19.1 million and $15.2$18.9 million, respectively, was incurred for base management fees. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, approximately $50.7$38.2 million and $45.4$38.5 million, respectively, was incurred for base management fees. In April 2020, our board of directors authorized the payment of our first quarter base management fee of $19.1 million in 1,422,143 shares of our common stock. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, there were $16.9$19.1 million and $15.7$19.3 million, respectively, of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.
Incentive Fee. For There were 0 incentive fees incurred during the three months ended SeptemberJune 30, 20172020 and 2016,2019. For the six months ended June 30, 2020 and 2019, approximately $10.4$15.8 million and $6.3 million, respectively, was incurred for incentive fees. For the nine months ended September 30, 2017 and 2016, approximately $20.2 million and $13.8$0.2 million, respectively, was incurred for incentive fees. As of September 30, 2017 and December 31, 2016, approximately $10.42019, there were $18.1 million and $19.0 million, respectively, of unpaid incentive fees were included in related-party payable in our condensed consolidated balance sheets. There were 0 unpaid incentive fees as of June 30, 2020.
Expense Reimbursement. For the three months ended SeptemberJune 30, 20172020 and 2016,2019, approximately $1.7$1.5 million and $1.5$1.7 million, respectively, was incurred for executive compensation and other reimbursable expenses and recognized within general and administrative expenses in our condensed consolidated statements of operations. For the ninesix months
42
ended SeptemberJune 30, 20172020 and 2016,2019, approximately $4.5$3.7 million and $4.1$3.9 million, respectively, was incurred for executive compensation and other reimbursable expenses. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, approximately $2.7$1.8 million and $3.0$3.5 million, respectively, of unpaid reimbursable executive compensation and other expenses were included in related-party payable in our condensed consolidated balance sheets.
Equity Awards. In certain instances, we issue RSAs to certain employees of affiliates of our Manager who perform services for us. During the three months ended SeptemberJune 30, 2017 and 2016, there2019, we granted 68,645 RSAs at a grant date fair value of $1.5 million. There were no RSAs granted.granted during the three months ended June 30, 2020. Expenses related to the vesting of awards to employees of affiliates of our Manager were $0.7$1.3 million and $0.6$1.0 million during the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, we granted 138,264341,635 and 169,104182,861 RSAs, respectively, at grant date fair values of $3.1$3.9 million and $3.3$4.1 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $2.1$2.4 million and $1.6$1.8 million during the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. These shares generally vest over a three-year period.
Manager Equity Plan
In MarchMay 2017, we granted 1,000,000 RSUs to ourthe Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager underEquity Plan (the “2017 Manager Equity Plan”), which replaced the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”). In May 2015,September 2019, we granted 675,0001,200,000 RSUs to our Manager under the 2017 Manager Equity Plan. In April 2018, we granted 775,000 RSUs to our Manager under the 2017 Manager Equity Plan. In March 2017, we granted 1,000,000 RSUs to our Manager under the Manager Equity Plan. In connection with these grants and prior similar grants, we recognized share-based compensation expense of $3.0$3.4 million and $5.7$3.2 million within management fees in our condensed consolidated statements of operations for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, we recognized $7.4$8.6 million and $15.8$6.4 million, respectively, related to these awards. Refer to Note 16 for further discussion of these grants.
In May 2017, the Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager Equity Plan (the “2017 Manager Equity Plan”) which replaces the Manager Equity Plan. Refer to Note 16 for further discussion.
Investments in Loans and Securities
In March 2017, we were fullyJanuary 2020, the Company originated a $3.5 million bridge loan to a third party borrower for the development and recapitalization of luxury cabin rentals. In February 2020, the bridge loan was repaid, $59.0 million upon the maturity of a subordinate single-borrower CMBS that we acquired in March 2015. The bond was secured by 85 U.S. hotel properties, and the borrower was an affiliate of Starwood Distressed Opportunity Fund IX, an affiliate of our Manager.
In May 2017, our conduit business acquired certain commercial real estate loans from an unaffiliated third party for an aggregate purchase price of $50.0 million. The underlying borrowers are affiliates of our Manager. During the three months ended September 30, 2017, $25.0 million of such loans were sold. The remaining $25.0 million of such
44
loans, which were included within loans held-for-sale in our condensed consolidated balance sheet as of September 30, 2017, were sold subsequent to September 30, 2017.
In June 2017, we amendedCompany originated a £75.0$99.0 million first mortgage forloan to the developmentsame borrower. The loan bears interest at a fixed rate of 10.5% plus fees and contains a three-property mixed use portfolio locatedterm of 36 months with 2 one-year extension options. Certain members of our executive team and board of directors own equity interests in Greater London, which wethe borrower. The investment was approved by our independent directors.
In January 2020, the Company co-originated a €70.3 million mezzanine loan with SEREF, an affiliate of our Manager, to the third party that acquired our property portfolio in 2016.Ireland in December 2019. The amendment reduced the first mortgage’s total commitment to £69.3 million, of which our share is £55.4Company and SEREF each originated €35.2 million. The loan matures in October 2025.
During the three and six months ended June 2019.30, 2020, the Company acquired $26.6 million and $127.4 million, respectively, of loans from a residential mortgage originator in which it holds an equity interest. Refer to Note 7 for further discussion.
Lease Arrangements
In August 2017,March 2020, we originatedentered into an office lease agreement with an entity which is controlled by our Chairman and CEO through majority equity ownership of the entity. The leased premises are currently under construction and will serve as our new Miami Beach office when our existing lease in Miami Beach expires on December 31, 2021. The lease will commence after delivery of the office space to us, but no earlier than July 30, 2021. The lease is for approximately 74,000 square feet of office space, has an initial term of 15 years and requires monthly lease payments starting in the tenth month after lease commencement. The lease payments are based on an annual base rate of $52.00 per square foot that increases by 3% each anniversary following commencement, plus our pro rata share of building operating expenses. In April 2020, we provided a $339.2$1.9 million first mortgagecash security deposit to the landlord. Prior to the execution of this lease, we engaged an independent third party leasing firm and mezzanine loanexternal counsel to advise the independent directors of our board of directors on market terms for the acquisitionlease. The terms of an office campus located in Irvine, California. An affiliatethe lease were approved by our independent directors.
43
Other Related-Party Arrangements
Investment in Unconsolidated Entities
In October 2014, we committed $150.0 million for a 33% equity interest in four regional shopping malls (the “Retail Fund”Highmark Residential (“Highmark”). In August 2017, we funded the remaining $15.5 million capital commitment associated with this investment (see Note 7). All leasing services and asset management functions for the properties are conducted by, an affiliate of our Manager, which specializes in redeveloping, managingprovides property management services for 21 properties within our Woodstar I Portfolio. Fees paid to Highmark are calculated as a percentage of gross receipts and repositioning retail real estate assets. In addition, another affiliateare at market terms. During the three months ended June 30, 2020 and 2019, property management fees to Highmark of our Manager serves as general partner of the Retail Fund.
Acquisitions from Consolidated CMBS Trusts
Our Investing$0.5 million and Servicing Segment acquires interests in properties for its REIS Equity Portfolio from CMBS trusts, some of which are consolidated as VIEs on our balance sheet. Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs$0.4 million, respectively, were recognized in our condensed consolidated statements of cash flows.operations. During the threesix months ended SeptemberJune 30, 2016, we acquired $3.3 million2020 and 2019, property management fees to Highmark of net real estate assets from consolidated CMBS trusts. No real estate assets were acquired from consolidated CMBS trusts during the three months ended September 30, 2017. During the nine months ended September 30, 2017 and 2016, we acquired $19.7$1.0 million and $88.4$0.7 million, respectively, were recognized in our condensed consolidated statements of net real estate assets from consolidated CMBS trusts and subsequently issued non-controlling interests of $5.5 million on the 2016 acquisitions. No non-controlling interests were issued during the nine months ended September 30, 2017. Refer to Note 3 for further discussion of these acquisitions. operations.
Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.
16. Stockholders’ Equity and Non-Controlling Interests
During the ninesix months ended SeptemberJune 30, 2017,2020, our board of directors declared the following dividends:
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|
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|
|
|
|
|
|
|
|
|
Declaration Date |
| Record Date |
| Ex-Dividend Date |
| Payment Date |
| Amount |
| Frequency | |
8/9/17 |
| 9/29/17 |
| 9/28/17 |
| 10/13/17 |
| $ | 0.48 |
| Quarterly |
5/9/17 |
| 6/30/17 |
| 6/28/17 |
| 7/14/17 |
| $ | 0.48 |
| Quarterly |
2/23/17 |
| 3/31/17 |
| 3/29/17 |
| 4/14/17 |
| $ | 0.48 |
| Quarterly |
| | | | | | | | | | | |
Declaration Date |
| Record Date |
| Ex-Dividend Date |
| Payment Date |
| Amount |
| Frequency | |
6/16/20 |
| 6/30/20 |
| 6/29/20 | | 7/15/20 | | $ | 0.48 |
| Quarterly |
2/25/20 |
| 3/31/20 |
| 3/30/20 | | 4/15/20 | | | 0.48 |
| Quarterly |
During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, there were no0 shares issued under our At-The-Market Equity Offering Sales Agreement. During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.
In February 2017,2020, our board of directors extendedauthorized the termrepurchase of up to $400.0 million of our $500.0 millionoutstanding common stockshares and Convertible Note repurchase program through January 2019. Refer to Note 17Notes over a period of one year. Purchases made pursuant to the consolidated financial statements includedprogram will be made either in our Form 10-K for further information regarding the repurchase program.open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements.The timing, manner, price and amount of any repurchases are discretionary and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. During the ninesix months ended SeptemberJune 30, 2016,2020, we repurchased 1,052,8891,925,421 shares of common stock for $19.7$28.8 million and no0 Convertible Notes under our repurchase program. There were no share repurchases or Convertible Note repurchases under the repurchase
45
program during the nine months ended September 30, 2017. The repurchase of the 2018 Notes discussed in Note 10 was not considered part of the repurchase program and therefore does not reduce our available capacity for future repurchases under the repurchase program. As of SeptemberJune 30, 2017,2020, we had $262.2$371.2 million of remaining capacity to repurchase common stock and/or Convertible Notes under the repurchase program through January 2019.program.
Equity Incentive Plans
In May 2017, the Company’s shareholders approved the 2017 Manager Equity Plan and the Starwood Property Trust, Inc. 2017 Equity Plan (the “2017 Equity Plan”), which allow for the issuance of up to 11,000,000 stock options, stock appreciation rights, RSAs, RSUs or other equity-based awards or any combination thereof to the Manager, directors, employees, consultants or any other party providing services to the Company. The 2017 Manager Equity Plan succeeds and replaces the Manager Equity Plan and the 2017 Equity Plan succeeds and replaces the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”) and the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (the “Non-Executive Director Stock Plan”).
The table below summarizes our share awards granted or vested under the Manager Equity Plan and the 2017 Manager Equity Plan during the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (dollar amounts in thousands):
| | | | | | | | | | |
Grant Date |
| Type |
| Amount Granted |
| Grant Date Fair Value |
| Vesting Period |
| |
September 2019 | | RSU | | 1,200,000 | | $ | 29,484 | | (1) | |
April 2018 | | RSU | | 775,000 | | | 16,329 | | 3 years | |
March 2017 | | RSU | | 1,000,000 | | | 22,240 | | 3 years | |
|
|
|
|
|
|
|
|
|
|
|
Grant Date |
| Type |
| Amount Granted |
| Grant Date Fair Value |
| Vesting Period |
| |
March 2017 |
| RSU |
| 1,000,000 |
| $ | 22,240 |
| 3 years |
|
May 2015 |
| RSU |
| 675,000 |
|
| 16,511 |
| 3 years |
|
January 2014 |
| RSU |
| 489,281 |
|
| 14,776 |
| 3 years |
|
January 2014 |
| RSU |
| 2,000,000 |
|
| 55,420 |
| 3 years |
|
(1) | Of the amount granted, 218,898 vested immediately on the grant date and the remaining amount vests over a three-year period. |
44
Schedule of Non-Vested Shares and Share Equivalents
| | | | | | | | | |
| | | | 2017 | | | | Weighted Average | |
| | 2017 | | Manager | | | | Grant Date Fair | |
| | Equity Plan | | Equity Plan | | Total | | Value (per share) | |
Balance as of January 1, 2020 |
| 1,413,170 |
| 1,305,597 |
| 2,718,767 |
| $ | 22.74 |
Granted | | 965,847 | | — |
| 965,847 | |
| 10.77 |
Vested |
| (474,367) | | (376,017) |
| (850,384) | |
| 22.40 |
Forfeited |
| (5,647) | | — |
| (5,647) | |
| 14.69 |
Balance as of June 30, 2020 |
| 1,899,003 |
| 929,580 |
| 2,828,583 |
| | 18.77 |
As of SeptemberJune 30, 2017,2020, there were 11.06.5 million shares of common stock available for future grants under the 2017 Manager Equity Plan and the 2017 Equity Plan.
ScheduleNon-Controlling Interests in Consolidated Subsidiaries
In connection with our Woodstar II Portfolio acquisitions, we issued 10.2 million Class A Units in our consolidated subsidiary, SPT Dolphin, and rights to receive an additional 1.9 million Class A Units if certain contingent events occur. As of Non-Vested SharesJune 30, 2020, 1.8 million of the 1.9 million contingent Class A Units were issued. The Class A Units are redeemable for consideration equal to the current share price of the Company’s common stock on a 1-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the determination of the Company. During the six months ended June 30, 2020, redemptions of 0.4 million of the Class A Units were received and Share Equivalents (1)
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|
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|
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|
|
|
|
|
|
| 2017 |
|
|
| Weighted Average | |
|
| 2017 |
| Manager |
|
|
| Grant Date Fair | |
|
| Equity Plan |
| Equity Plan |
| Total |
| Value (per share) | |
Balance as of January 1, 2017 |
| 539,124 |
| 281,250 |
| 820,374 |
| $ | 22.34 |
Granted |
| 548,160 |
| 1,000,000 |
| 1,548,160 |
|
| 22.27 |
Vested |
| (337,192) |
| (335,416) |
| (672,608) |
|
| 22.69 |
Forfeited |
| (34,531) |
| — |
| (34,531) |
|
| 22.56 |
Balance as of September 30, 2017 |
| 715,561 |
| 945,834 |
| 1,661,395 |
|
| 22.09 |
|
|
settled in common stock, leaving 10.6 million Class A Units outstanding as of June 30, 2020. There were 0 redemptions of the Class A units during the three months ended June 30, 2020. In consolidation, the outstanding Class A Units are reflected as non-controlling interests in consolidated subsidiaries on our condensed consolidated balance sheets, the balance of which was $227.1 million and $235.9 million as of June 30, 2020 and December 31, 2019, respectively.
To the extent SPT Dolphin has sufficient cash available, the Class A Units earn a preferred return indexed to the dividend rate of the Company’s common stock. Any distributions made pursuant to this waterfall are recognized within net income attributable to non-controlling interests in our condensed consolidated statements of operations. During the three and six months ended June 30, 2020, we recognized net income attributable to non-controlling interests of $5.1 million and $10.2 million, respectively, associated with these Class A Units. During the three and six months ended June 30, 2019, we recognized net income attributable to non-controlling interests of $5.4 million and $11.1 million, respectively, associated with these Class A Units.
As discussed in Note 14, we entered into the CMBS JV within our Investing and Servicing Segment in December 2019. Because the CMBS JV was deemed a VIE for which we were the primary beneficiary, this transaction was not recognized as a sale for GAAP purposes. Instead, the 49% interest of our joint venture partner is reflected as a non-controlling interest in consolidated subsidiaries on our consolidated balance sheets, and any net income attributable to this 49% joint venture interest is reflected within net income attributable to non-controlling interests in our consolidated statement of operations. The non-controlling interests in the CMBS JV were $126.4 million and $175.6 million as of June 30, 2020 and December 31, 2019, respectively. During the three and six months ended June 30, 2020, net income attributable to non-controlling interests was $6.8 million and $0.8 million, respectively.
46
45
The following table provides a reconciliation of net income and the number of shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share amounts):
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Basic Earnings | | | | | | | | | | | | |
Income attributable to STWD common stockholders | | $ | 139,656 | | $ | 127,016 | | $ | 72,887 | | $ | 197,399 |
Less: Income attributable to participating shares not already deducted as non-controlling interests | |
| (1,143) | |
| (751) | |
| (2,365) | |
| (1,575) |
Basic earnings | | $ | 138,513 | | $ | 126,265 | | $ | 70,522 | | $ | 195,824 |
| | | | | | | | | | | | |
Diluted Earnings | | | | | | | | | | | | |
Income attributable to STWD common stockholders | | $ | 139,656 | | $ | 127,016 | | $ | 72,887 | | $ | 197,399 |
Less: Income attributable to participating shares not already deducted as non-controlling interests | |
| (1,143) | |
| (751) | |
| (2,365) | |
| (1,575) |
Add: Interest expense on Convertible Notes (1) | | | 3,051 | | | 3,049 | | | * | | | 6,235 |
Add: Undistributed earnings to participating shares | |
| 120 | |
| — | |
| — | |
| — |
Less: Undistributed earnings reallocated to participating shares | |
| (116) | |
| — | |
| — | |
| — |
Diluted earnings | | $ | 141,568 | | $ | 129,314 | | $ | 70,522 | | $ | 202,059 |
| | | | | | | | | | | | |
Number of Shares: | | | | | | | | | | | | |
Basic — Average shares outstanding | |
| 281,461 | |
| 279,239 | |
| 281,225 | |
| 278,396 |
Effect of dilutive securities — Convertible Notes (1) | |
| 9,649 | |
| 9,649 | |
| * | |
| 9,963 |
Effect of dilutive securities — Unvested non-participating shares | | | 183 | | | 184 | | | 215 | | | 170 |
Diluted — Average shares outstanding | |
| 291,293 | |
| 289,072 | |
| 281,440 | |
| 288,529 |
| | | | | | | | | | | | |
Earnings Per Share Attributable to STWD Common Stockholders: | | | | | | | | | | | | |
Basic | | $ | 0.49 | | $ | 0.45 | | $ | 0.25 | | $ | 0.70 |
Diluted | | $ | 0.49 | | $ | 0.45 | | $ | 0.25 | | $ | 0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
| For the Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Basic Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to STWD common stockholders |
| $ | 88,428 |
| $ | 105,766 |
| $ | 308,166 |
| $ | 243,896 |
Less: Income attributable to participating shares |
|
| (761) |
|
| (456) |
|
| (2,489) |
|
| (1,743) |
Basic earnings |
| $ | 87,667 |
| $ | 105,310 |
| $ | 305,677 |
| $ | 242,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Basic — Income attributable to STWD common stockholders |
| $ | 88,428 |
| $ | 105,766 |
| $ | 308,166 |
| $ | 243,896 |
Less: Income attributable to participating shares |
|
| (761) |
|
| (456) |
|
| (2,489) |
|
| (1,743) |
Add: Undistributed earnings to participating shares |
|
| — |
|
| — |
|
| — |
|
| — |
Less: Undistributed earnings reallocated to participating shares |
|
| — |
|
| — |
|
| — |
|
| — |
Diluted earnings |
| $ | 87,667 |
| $ | 105,310 |
| $ | 305,677 |
| $ | 242,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic — Average shares outstanding |
|
| 259,759 |
|
| 237,429 |
|
| 259,412 |
|
| 237,017 |
Effect of dilutive securities — Convertible Notes |
|
| 2,313 |
|
| 3,445 |
|
| 2,284 |
|
| 3,766 |
Effect of dilutive securities — Contingently issuable shares |
|
| 236 |
|
| 138 |
|
| 236 |
|
| 138 |
Effect of dilutive securities — Unvested non-participating shares |
|
| 129 |
|
| 79 |
|
| 123 |
|
| 61 |
Diluted — Average shares outstanding |
|
| 262,437 |
|
| 241,091 |
|
| 262,055 |
|
| 240,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share Attributable to STWD Common Stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.34 |
| $ | 0.44 |
| $ | 1.18 |
| $ | 1.02 |
Diluted |
| $ | 0.33 |
| $ | 0.44 |
| $ | 1.17 |
| $ | 1.00 |
(1) | The Company does not intend to fully settle the principal amount of the Convertible Notes in cash upon conversion. Accordingly, under GAAP, the dilutive effect to EPS for the periods presented above is determined using the “if-converted” method whereby interest expense or any loss on extinguishment of our Convertible Notes is added back to the diluted EPS numerator and the full number of potential shares contingently issuable upon their conversion is included in the diluted EPS denominator, if dilutive. Refer to Note 10 for further discussion. |
* Our Convertible Notes were not dilutive for the six months ended June 30, 2020.
As of SeptemberJune 30, 20172020 and 2016,2019, participating shares of 1.613.0 million and 0.912.8 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.
Additionally, as of September Such participating shares at June 30, 2017, there were 61.92020 and 2019 included 10.6 million and 11.2 million potential shares, respectively, of our common stock contingently issuable upon the conversionredemption of the Convertible Notes. The Company has asserted its intent and ability to settle the principal amount of the Convertible NotesClass A Units in cash. As a result, this principal amount, representing 59.6 million shares at September 30, 2017, was not included in the computation of diluted EPS. However,SPT Dolphin, as discussed in Note 10, the conversion options associated with the 2018 Notes and 2019 Notes are “in-the-money” as the if-converted values of the 2018 Notes and 2019 Notes exceeded their principal amounts by $16.4 million and $34.6 million, respectively, at September 30, 2017. The dilutive effect to EPS is determined by dividing this “conversion spread value” by the average share price. The “conversion spread value” is the value that would be delivered to investors in shares based on the terms of the Convertible Notes, upon an assumed conversion. In calculating the dilutive effect of these shares, the treasury stock method was used and resulted in a dilution of 2.3 million shares for the three and nine months ended September 30, 2017. The conversion options associated with the 2017 Notes and 2023 Notes are “out-of-the-money” because the if-converted values of the 2017 Notes and 2023 Notes were less than their principal amounts by $38.5 million and $40.4 million, respectively, at September 30, 2017; therefore, there was no dilutive effect to EPS for the 2017 Notes and 2023 Notes.
47
16.
46
18. Accumulated Other Comprehensive Income
The changes in AOCI by component are as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
| Cumulative |
|
|
|
|
|
| ||||||||||
|
|
|
|
| Unrealized Gain |
|
|
|
|
|
| ||||||||||
|
| Effective Portion of |
| (Loss) on |
| Foreign |
|
|
| ||||||||||||
|
| Cumulative Loss on |
| Available-for- |
| Currency |
|
|
| ||||||||||||
|
| Cash Flow Hedges |
| Sale Securities |
| Translation |
| Total | |||||||||||||
Three Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at July 1, 2017 |
| $ | 52 |
| $ | 51,682 |
| $ | 4,247 |
| $ | 55,981 | |||||||||
| | | | | | | | | | ||||||||||||
|
| Cumulative |
| | |
| | | |||||||||||||
| | Unrealized Gain | | | | | | | |||||||||||||
| | (Loss) on | | Foreign | | | | ||||||||||||||
| | Available-for- | | Currency | | | | ||||||||||||||
| | Sale Securities | | Translation | | Total | |||||||||||||||
Three Months Ended June 30, 2020 | | | | | | | | | | ||||||||||||
Balance at April 1, 2020 | | $ | 35,948 | | $ | (64) | | $ | 35,884 | ||||||||||||
OCI before reclassifications |
|
| (3) |
|
| 3,975 |
|
| 5,337 |
|
| 9,309 | |
| 6,982 | |
| — | |
| 6,982 |
Amounts reclassified from AOCI |
|
| (19) |
|
| — |
|
| — |
|
| (19) | |
| — | |
| — | |
| — |
Net period OCI |
|
| (22) |
|
| 3,975 |
|
| 5,337 |
|
| 9,290 | |
| 6,982 | |
| — | |
| 6,982 |
Balance at September 30, 2017 |
| $ | 30 |
| $ | 55,657 |
| $ | 9,584 |
| $ | 65,271 | |||||||||
Three Months Ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at July 1, 2016 |
| $ | (386) |
| $ | 39,858 |
| $ | (6,845) |
| $ | 32,627 | |||||||||
Balance at June 30, 2020 | | $ | 42,930 | | $ | (64) | | $ | 42,866 | ||||||||||||
Three Months Ended June 30, 2019 | | | | | | | | | | ||||||||||||
Balance at April 1, 2019 | | $ | 53,128 | | $ | 2,670 | | $ | 55,798 | ||||||||||||
OCI before reclassifications |
|
| 107 |
|
| 6,105 |
|
| 1,331 |
|
| 7,543 | | | (79) | |
| 1,405 | |
| 1,326 |
Amounts reclassified from AOCI |
|
| 78 |
|
| — |
|
| — |
|
| 78 | |
| — | |
| — | |
| — |
Net period OCI |
|
| 185 |
|
| 6,105 |
|
| 1,331 |
|
| 7,621 | |
| (79) | |
| 1,405 | |
| 1,326 |
Balance at September 30, 2016 |
| $ | (201) |
| $ | 45,963 |
| $ | (5,514) |
| $ | 40,248 | |||||||||
Nine Months Ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at January 1, 2017 |
| $ | (26) |
| $ | 44,929 |
| $ | (8,765) |
| $ | 36,138 | |||||||||
Balance at June 30, 2019 | | $ | 53,049 | | $ | 4,075 | | $ | 57,124 | ||||||||||||
Six Months Ended June 30, 2020 | | | | | | | | | | ||||||||||||
Balance at January 1, 2020 | | $ | 50,996 | | $ | (64) | | $ | 50,932 | ||||||||||||
OCI before reclassifications |
|
| 45 |
|
| 10,823 |
|
| 18,349 |
|
| 29,217 | |
| (8,066) | |
| — | |
| (8,066) |
Amounts reclassified from AOCI |
|
| 11 |
|
| (95) |
|
| — |
|
| (84) | |
| — | |
| — | |
| — |
Net period OCI |
|
| 56 |
|
| 10,728 |
|
| 18,349 |
|
| 29,133 | |
| (8,066) | |
| — | |
| (8,066) |
Balance at September 30, 2017 |
| $ | 30 |
| $ | 55,657 |
| $ | 9,584 |
| $ | 65,271 | |||||||||
Nine Months Ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Balance at January 1, 2016 |
| $ | (65) |
| $ | 37,307 |
| $ | (7,513) |
| $ | 29,729 | |||||||||
Balance at June 30, 2020 | | $ | 42,930 | | $ | (64) | | $ | 42,866 | ||||||||||||
Six Months Ended June 30, 2019 | | | | | | | | | | ||||||||||||
Balance at January 1, 2019 | | $ | 53,515 | | $ | 5,145 | | $ | 58,660 | ||||||||||||
OCI before reclassifications |
|
| (397) |
|
| 8,656 |
|
| 1,999 |
|
| 10,258 | |
| (466) | |
| (1,070) | |
| (1,536) |
Amounts reclassified from AOCI |
|
| 261 |
|
| — |
|
| — |
|
| 261 | |
| — | |
| — | |
| — |
Net period OCI |
|
| (136) |
|
| 8,656 |
|
| 1,999 |
|
| 10,519 | |
| (466) | |
| (1,070) | |
| (1,536) |
Balance at September 30, 2016 |
| $ | (201) |
| $ | 45,963 |
| $ | (5,514) |
| $ | 40,248 | |||||||||
Balance at June 30, 2019 | | $ | 53,049 | | $ | 4,075 | | $ | 57,124 |
The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amounts Reclassified from |
| Amounts Reclassified from |
|
| ||||||||
|
| AOCI during the Three Months |
| AOCI during the Nine Months |
| Affected Line Item | ||||||||
|
| Ended September 30, |
| Ended September 30, |
| in the Statements | ||||||||
Details about AOCI Components |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| of Operations | ||||
Gain (loss) on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
| $ | 19 |
| $ | (78) |
| $ | (11) |
| $ | (261) |
| Interest expense |
Unrealized gains on available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest realized upon collection |
|
| — |
|
| — |
|
| 95 |
|
| — |
| Interest income from investment securities |
Total reclassifications for the period |
| $ | 19 |
| $ | (78) |
| $ | 84 |
| $ | (261) |
|
|
48
47
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Valuation Process
We have valuation control processes in place to validate the fair value of the Company’s financial assets and liabilities measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. ReferIn the event that observable inputs are not available, the control processes are designed to Note 20assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable.
Pricing Verification—We use recently executed transactions, other observable market data such as exchange data, broker/dealer quotes, third party pricing vendors and aggregation services for validating the fair values generated using valuation models. Pricing data provided by approved external sources is evaluated using a number of approaches; for example, by corroborating the external sources’ prices to executed trades, analyzing the methodology and assumptions used by the external source to generate a price and/or by evaluating how active the third party pricing source (or originating sources used by the third party pricing source) is in the market.
Unobservable Inputs—Where inputs are not observable, we review the appropriateness of the proposed valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs.
Any changes to the consolidated financial statements included invaluation methodology will be reviewed by our Form 10-K for further discussionmanagement to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation process.methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value could result in a different estimate of fair value at the reporting date.
Fair Value on a Recurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a recurring basis as follows:
Loans held-for-sale, commercial
We measure the fair value of our commercial mortgage loans held-for-sale using a discounted cash flow analysis unless observable market data (i.e., securitized pricing) is available. A discounted cash flow analysis requires management to make estimates regarding future interest rates and credit spreads. The most significant of these inputs relates to credit spreads and is unobservable. Thus, we have determined that the fair values of mortgage loans valued using a discounted cash flow analysis should be classified in Level III of the fair value hierarchy, while mortgage loans
48
valued using securitized pricing should be classified in Level II of the fair value hierarchy. Mortgage loans classified in Level III are transferred to Level II if securitized pricing becomes available.
Loans held-for-sale and loans held-for-investment, residential
We measure the fair value of our residential mortgage loans held-for-sale and held-for-investment based on the net present value of expected future cash flows using a combination of observable and unobservable inputs. Observable market participant assumptions include pricing related to trades of residential mortgage loans with similar characteristics. Unobservable inputs include the expectation of future cash flows, which involves judgments about the underlying collateral, the creditworthiness of the borrower, estimated prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs, these loans have been classified within Level III.
RMBS
RMBS are valued utilizing observable and unobservable market inputs. The observable market inputs include recent transactions, broker quotes and vendor prices (“market data”). However, given the implied price dispersion amongst the market data, the fair value determination for RMBS has also utilized significant unobservable inputs in discounted cash flow models including prepayments, default and severity estimates based on the recent performance of the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macroeconomic events (e.g., housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs these securities have been classified within Level III.
CMBS
CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities and the spreads used in the prior valuation. We obtain current market spread information where available and use this information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value hierarchy. CMBS may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the CMBS become or cease to be observable.
Equity security
The equity security is publicly registered and traded in the U.S. and its market price is listed on the London Stock Exchange. The security has been classified within Level I.
Domestic servicing rights
The fair value of this intangible is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this intangible in its entirety should be classified in Level III of the fair value hierarchy.
Derivatives
The valuation of derivative contracts are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted
49
expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The valuation of over the counter derivatives are determined using discounted cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. For credit index instruments, fair value is determined based on changes in the relevant indices from the date of initiation of the instrument to the reporting date, as these changes determine the amount of any future cash settlement between us and the counterparty. These indices are considered Level II inputs as they are directly observable.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2020 and December 31, 2019, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level II of the fair value hierarchy.
Liabilities of consolidated VIEs
Our consolidated VIE liabilities generally represent bonds that are not owned by us. The majority of these are either traded in the marketplace or can be analogized to similar securities that are traded in the marketplace. For these liabilities, pricing is considered to be Level II, where the valuation is based upon quoted prices for similar instruments traded in active markets. We generally utilize third party pricing service providers for valuing these liabilities. In order to determine whether to utilize the valuations provided by third parties, we conduct an ongoing evaluation of their valuation methodologies and processes, as well as a review of the individual valuations themselves. In evaluating third party pricing for reasonableness, we consider a variety of factors, including market transaction information for the particular bond, market transaction information for bonds within the same trust, market transaction information for similar bonds, the bond’s ratings and the bond’s subordination levels.
For the minority portion of our consolidated VIE liabilities which consist of unrated or non-investment grade bonds that are not owned by us, pricing may be either Level II or Level III. If independent third party pricing similar to that noted above is available, we consider the valuation to be Level II. If such third party pricing is not available, the valuation is generated from model-based techniques that use significant unobservable assumptions, and we consider the valuation to be Level III. For VIE liabilities classified as Level III, valuation is determined based on discounted expected future cash flows which take into consideration expected duration and yields based on market transaction information, ratings, subordination levels, vintage and current market spread. VIE liabilities may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the VIE liabilities become or cease to be observable.
Assets of consolidated VIEs
The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets of the VIE, we maximize the use of observable inputs over unobservable inputs. The individual assets of a VIE are inherently incapable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Because our methodology for valuing these assets does not value the individual assets of a VIE, but rather uses the value of the VIE
50
liabilities as an indicator of the fair value of VIE assets as a whole, we have determined that our valuations of VIE assets in their entirety should be classified in Level III of the fair value hierarchy.
Fair Value on a Nonrecurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a nonrecurring basis as follows:
Loans held-for-sale, infrastructure
We measure the fair value of infrastructure loans held-for-sale, which are carried at the lower of amortized cost or fair value, utilizing bids periodically received from third parties to acquire these assets. As these bids represent observable market data, we have determined that the fair value of these assets would be classified in Level II of the fair value hierarchy.
Fair Value Only Disclosed
We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:
Loans held-for-investment and loans held-for-sale
We estimate the fair values of our loans not carried at fair value on a recurring basis by discounting their expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the financial statements. Since these inputs are unobservable, we have determined that the fair value of these loans in their entirety would be classified in Level III of the fair value hierarchy.
HTM debt securities
We estimate the fair value of our mandatorily redeemable preferred equity interests in commercial real estate companies and infrastructure bonds using the same methodology described for our loans held-for-investment. We estimate the fair value of our HTM CMBS using the same methodology described for our CMBS carried at fair value on a recurring basis.
Secured financing agreements, CLO and unsecured senior notes not convertible
The fair value of the secured financing agreements, CLO and unsecured senior notes not convertible are determined by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if executed in the current market. We have determined that our valuation of these instruments should be classified in Level III of the fair value hierarchy.
Convertible Notes
The fair value of the debt component of our Convertible Notes is estimated by discounting the contractual cash flows at the interest rate we estimate such notes would bear if sold in the current market without the embedded conversion option which, in accordance with ASC 470, is reflected as a component of equity. We have determined that our valuation of our Convertible Notes should be classified in Level III of the methodology described in our Form 10-K.fair value hierarchy.
51
Fair Value Disclosures
The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| September 30, 2017 | ||||||||||||||||||||||
|
| Total |
| Level I |
| Level II |
| Level III | ||||||||||||||||
| | | | | | | | | | | | | ||||||||||||
| | June 30, 2020 | ||||||||||||||||||||||
|
| Total |
| Level I |
| Level II |
| Level III | ||||||||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Loans held-for-sale, fair value option |
| $ | 608,624 |
| $ | — |
| $ | — |
| $ | 608,624 | ||||||||||||
Loans under fair value option | | $ | 894,613 | | $ | — | | $ | — | | $ | 894,613 | ||||||||||||
RMBS |
|
| 253,252 |
|
| — |
|
| — |
|
| 253,252 | |
| 174,281 | |
| — | |
| — | |
| 174,281 |
CMBS |
|
| 23,841 |
|
| — |
|
| — |
|
| 23,841 | |
| 23,530 | |
| — | |
| 1,639 | |
| 21,891 |
Equity security |
|
| 13,529 |
|
| 13,529 |
|
| — |
|
| — | |
| 9,791 | |
| 9,791 | |
| — | |
| — |
Domestic servicing rights |
|
| 33,781 |
|
| — |
|
| — |
|
| 33,781 | |
| 13,955 | |
| — | |
| — | |
| 13,955 |
Derivative assets |
|
| 38,293 |
|
| — |
|
| 38,293 |
|
| — | |
| 90,905 | |
| — | |
| 90,905 | |
| — |
VIE assets |
|
| 51,197,981 |
|
| — |
|
| — |
|
| 51,197,981 | |
| 64,175,387 | |
| — | |
| — | |
| 64,175,387 |
Total |
| $ | 52,169,301 |
| $ | 13,529 |
| $ | 38,293 |
| $ | 52,117,479 | | $ | 65,382,462 | | $ | 9,791 | | $ | 92,544 | | $ | 65,280,127 |
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
Derivative liabilities |
| $ | 22,890 |
| $ | — |
| $ | 22,890 |
| $ | — | | $ | 3,880 | | $ | — | | $ | 3,880 | | $ | — |
VIE liabilities |
|
| 50,150,781 |
|
| — |
|
| 47,890,998 |
|
| 2,259,783 | |
| 62,617,975 | |
| — | |
| 60,488,446 | |
| 2,129,529 |
Total |
| $ | 50,173,671 |
| $ | — |
| $ | 47,913,888 |
| $ | 2,259,783 | | $ | 62,621,855 | | $ | — | | $ | 60,492,326 | | $ | 2,129,529 |
| | | | | | | | | | | | |
| | December 31, 2019 | ||||||||||
|
| Total |
| Level I |
| Level II |
| Level III | ||||
Financial Assets: | | | | | | | | | | | | |
Loans under fair value option | | $ | 1,436,194 | | $ | — | | $ | — | | $ | 1,436,194 |
RMBS | |
| 189,576 | |
| — | |
| — | |
| 189,576 |
CMBS | |
| 37,360 | |
| — | |
| 12,352 | |
| 25,008 |
Equity security | |
| 12,664 | |
| 12,664 | |
| — | |
| — |
Domestic servicing rights | |
| 16,917 | |
| — | |
| — | |
| 16,917 |
Derivative assets | |
| 28,943 | |
| — | |
| 28,943 | |
| — |
VIE assets | |
| 62,187,175 | |
| — | |
| | |
| 62,187,175 |
Total | | $ | 63,908,829 | | $ | 12,664 | | $ | 41,295 | | $ | 63,854,870 |
Financial Liabilities: | | | | | | | | | | | | |
Derivative liabilities | | $ | 8,740 | | $ | — | | $ | 8,740 | | $ | — |
VIE liabilities | |
| 60,743,494 | |
| — | |
| 58,206,102 | |
| 2,537,392 |
Total | | $ | 60,752,234 | | $ | — | | $ | 58,214,842 | | $ | 2,537,392 |
49
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 | ||||||||||
|
| Total |
| Level I |
| Level II |
| Level III | ||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale, fair value option |
| $ | 63,279 |
| $ | — |
| $ | — |
| $ | 63,279 |
RMBS |
|
| 253,915 |
|
| — |
|
| — |
|
| 253,915 |
CMBS |
|
| 31,546 |
|
| — |
|
| — |
|
| 31,546 |
Equity security |
|
| 12,177 |
|
| 12,177 |
|
| — |
|
| — |
Domestic servicing rights |
|
| 55,082 |
|
| — |
|
| — |
|
| 55,082 |
Derivative assets |
|
| 89,361 |
|
| — |
|
| 89,361 |
|
| — |
VIE assets |
|
| 67,123,261 |
|
| — |
|
| — |
|
| 67,123,261 |
Total |
| $ | 67,628,621 |
| $ | 12,177 |
| $ | 89,361 |
| $ | 67,527,083 |
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
| $ | 3,904 |
| $ | — |
| $ | 3,904 |
| $ | — |
VIE liabilities |
|
| 66,130,592 |
|
| — |
|
| 63,545,223 |
|
| 2,585,369 |
Total |
| $ | 66,134,496 |
| $ | — |
| $ | 63,549,127 |
| $ | 2,585,369 |
50
The changes in financial assets and liabilities classified as Level III are as follows for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Domestic |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
| Loans |
|
|
|
|
|
|
| Servicing |
|
|
|
| VIE |
|
|
| ||||||||||||||||||||||||
Three Months Ended September 30, 2017 |
| Held‑for‑sale |
| RMBS |
| CMBS |
| Rights |
| VIE Assets |
| Liabilities |
| Total | ||||||||||||||||||||||||||||
July 1, 2017 balance |
| $ | 610,116 |
| $ | 256,397 |
| $ | 13,848 |
| $ | 38,648 |
| $ | 53,902,715 |
| $ | (2,164,593) |
| $ | 52,657,131 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
|
| | |
| | |
| | |
| Domestic |
| | |
| | |
| | | ||||||||||||||||||||||
| | Loans at | | | | | | | | Servicing | | | | | VIE | | | | ||||||||||||||||||||||||
Three Months Ended June 30, 2020 | | Fair Value | | RMBS | | CMBS | | Rights | | VIE Assets | | Liabilities | | Total | ||||||||||||||||||||||||||||
April 1, 2020 balance | | $ | 1,347,797 | | $ | 170,640 | | $ | 22,435 | | $ | 16,524 | | $ | 61,157,805 | | $ | (1,506,437) | | $ | 61,208,764 | |||||||||||||||||||||
Total realized and unrealized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Change in fair value / gain on sale |
|
| 19,485 |
|
| — |
|
| (673) |
|
| (4,867) |
|
| (3,533,620) |
|
| 151,273 |
|
| (3,368,402) | |
| 34,450 | |
| — | |
| (351) | | | (2,569) | |
| 2,417,647 | |
| (8,686) | |
| 2,440,491 |
Net accretion |
|
| — |
|
| 3,187 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,187 | |
| — | |
| 2,673 | |
| — | |
| — | |
| — | |
| — | |
| 2,673 |
Included in OCI |
|
| — |
|
| 3,975 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,975 | |
| — | |
| 6,982 | |
| — | |
| — | |
| — | |
| — | |
| 6,982 |
Purchases / Originations |
|
| 524,409 |
|
| — |
|
| 11,798 |
|
| — |
|
| — |
|
| — |
|
| 536,207 | |
| 140,700 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 140,700 |
Sales |
|
| (517,350) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (517,350) | |
| (589,694) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (589,694) |
Issuances |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1,469) |
|
| (1,469) | |||||||||||||||||||||
Cash repayments / receipts |
|
| (28,036) |
|
| (10,307) |
|
| (1,666) |
|
| — |
|
| — |
|
| (4,910) |
|
| (44,919) | |
| (38,640) | |
| (6,014) | |
| (193) | |
| — | |
| — | |
| (344) | |
| (45,191) |
Transfers into Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (233,367) |
|
| (233,367) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (655,942) | |
| (655,942) |
Transfers out of Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 67,272 |
|
| 67,272 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 41,880 | |
| 41,880 |
Consolidation of VIEs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 964,564 |
|
| (75,585) |
|
| 888,979 | |
| — | |
| — | |
| — | |
| — | |
| 599,935 | |
| — | |
| 599,935 |
Deconsolidation of VIEs |
|
| — |
|
| — |
|
| 534 |
|
| — |
|
| (135,678) |
|
| 1,596 |
|
| (133,548) | |||||||||||||||||||||
September 30, 2017 balance |
| $ | 608,624 |
| $ | 253,252 |
| $ | 23,841 |
| $ | 33,781 |
| $ | 51,197,981 |
| $ | (2,259,783) |
| $ | 49,857,696 | |||||||||||||||||||||
Amount of total (losses) gains included in earnings attributable to assets still held at September 30, 2017 |
| $ | (2,597) |
| $ | 3,187 |
| $ | (230) |
| $ | (4,867) |
| $ | (3,533,620) |
| $ | 151,273 |
| $ | (3,386,854) | |||||||||||||||||||||
June 30, 2020 balance | | $ | 894,613 | | $ | 174,281 | | $ | 21,891 | | $ | 13,955 | | $ | 64,175,387 | | $ | (2,129,529) | | $ | 63,150,598 | |||||||||||||||||||||
Amount of unrealized gains (losses) attributable to assets still held at June 30, 2020: | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
Included in earnings | | $ | 20,349 | | $ | 2,673 | | $ | (351) | | $ | (2,569) | | $ | 2,417,647 | | $ | (8,686) | | $ | 2,429,063 | |||||||||||||||||||||
Included in OCI | | $ | — | | $ | 6,982 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 6,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Domestic |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
| Loans |
|
|
|
|
|
|
| Servicing |
|
|
|
| VIE |
|
|
| ||||||||||||||||||||||||
Three Months Ended September 30, 2016 |
| Held‑for‑sale |
| RMBS |
| CMBS |
| Rights |
| VIE Assets |
| Liabilities |
| Total | ||||||||||||||||||||||||||||
July 1, 2016 balance |
| $ | 237,106 |
| $ | 251,260 |
| $ | 114,340 |
| $ | 83,301 |
| $ | 80,076,117 |
| $ | (3,540,652) |
| $ | 77,221,472 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
|
| | |
| | |
| | |
| Domestic |
| | |
| | |
| | | ||||||||||||||||||||||
| | Loans at | | | | | | | | Servicing | | | | | VIE | | | | ||||||||||||||||||||||||
Three Months Ended June 30, 2019 | | Fair Value | | RMBS | | CMBS | | Rights | | VIE Assets | | Liabilities | | Total | ||||||||||||||||||||||||||||
April 1, 2019 balance | | $ | 841,687 | | $ | 204,835 | | $ | 38,335 | | $ | 19,790 | | $ | 56,974,864 | | $ | (2,046,559) | | $ | 56,032,952 | |||||||||||||||||||||
Total realized and unrealized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Change in fair value / gain on sale |
|
| 49,996 |
|
| — |
|
| (2,993) |
|
| (14,283) |
|
| (8,143,518) |
|
| 653,103 |
|
| (7,457,695) | |
| 21,891 | |
| — | |
| 1,016 | | | (916) | |
| 126,589 | |
| 3,492 | |
| 152,072 |
Net accretion |
|
| — |
|
| 4,197 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 4,197 | |
| — | |
| 2,535 | |
| — | |
| — | |
| — | |
| — | |
| 2,535 |
Included in OCI |
|
| — |
|
| 6,105 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 6,105 | |
| — | |
| (79) | |
| — | |
| — | |
| — | |
| — | |
| (79) |
Purchases / Originations |
|
| 709,045 |
|
| 8,868 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 717,913 | | | 911,938 | |
| — | |
| — | |
| — | |
| — | |
| — | | | 911,938 |
Sales |
|
| (648,179) |
|
| — |
|
| (17,456) |
|
| — |
|
| — |
|
| — |
|
| (665,635) | |
| (367,045) | |
| — | |
| (750) | |
| — | |
| — | |
| — | |
| (367,795) |
Issuances | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (25,045) | |
| (25,045) | |||||||||||||||||||||
Cash repayments / receipts |
|
| (478) |
|
| (9,917) |
|
| (12,289) |
|
| — |
|
| — |
|
| 7,819 |
|
| (14,865) | | | (36,073) | |
| (6,417) | |
| (5,402) | |
| — | |
| — | |
| (2,881) | |
| (50,773) |
Transfers into Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (1) |
|
| (1) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (594,399) | |
| (594,399) |
Transfers out of Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 40,959 |
|
| 40,959 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 294,227 | |
| 294,227 |
Consolidation of VIEs |
|
| — |
|
| — |
|
| (24,403) |
|
| — |
|
| 2,268,424 |
|
| (109,913) |
|
| 2,134,108 | |
| — | |
| — | |
| — | |
| — | |
| 824,070 | |
| (4,541) | |
| 819,529 |
Deconsolidation of VIEs |
|
| — |
|
| — |
|
| 1,586 |
|
| — |
|
| (277,324) |
|
| 37,188 |
|
| (238,550) | |
| — | |
| — | |
| 1,084 | |
| — | |
| (257,917) | |
| 1,704 | |
| (255,129) |
September 30, 2016 balance |
| $ | 347,490 |
| $ | 260,513 |
| $ | 58,785 |
| $ | 69,018 |
| $ | 73,923,699 |
| $ | (2,911,497) |
| $ | 71,748,008 | |||||||||||||||||||||
Amount of total gains (losses) included in earnings attributable to assets still held at September 30, 2016 |
| $ | 9,746 |
| $ | 4,197 |
| $ | (1,852) |
| $ | (14,283) |
| $ | (8,143,518) |
| $ | 653,103 |
| $ | (7,492,607) | |||||||||||||||||||||
June 30, 2019 balance | | $ | 1,372,398 | | $ | 200,874 | | $ | 34,283 | | $ | 18,874 | | $ | 57,667,606 | | $ | (2,374,002) | | $ | 56,920,033 | |||||||||||||||||||||
Amount of unrealized gains (losses) included in earnings attributable to assets still held at June 30, 2019 | | $ | 5,547 | | $ | 2,535 | | $ | 410 | | $ | (916) | | $ | 126,589 | | $ | 3,492 | | $ | 137,657 |
51
53
| | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| Domestic |
| | |
| | |
| | | |
| | Loans at | | | | | | | | Servicing | | | | | VIE | | | | |||
Six Months Ended June 30, 2020 | | Fair Value | | RMBS | | CMBS | | Rights | | VIE Assets | | Liabilities | | Total | |||||||
January 1, 2020 balance | | $ | 1,436,194 | | $ | 189,576 | | $ | 25,008 | | $ | 16,917 | | $ | 62,187,175 | | $ | (2,537,392) | | $ | 61,317,478 |
Total realized and unrealized gains (losses): | | | | | | | | | | | | | | | | | | | | | |
Included in earnings: | | | | | | | | | | | | | | | | | | | | | |
Change in fair value / gain on sale | |
| 18,316 | |
| — | |
| 5,387 | |
| (2,962) | |
| (1,089,145) | |
| 137,596 | |
| (930,808) |
Net accretion | |
| — | |
| 5,334 | |
| — | |
| — | |
| — | |
| — | |
| 5,334 |
Included in OCI | |
| — | |
| (8,066) | |
| — | |
| — | |
| — | |
| — | |
| (8,066) |
Purchases / Originations | |
| 887,580 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 887,580 |
Sales | |
| (1,341,440) | |
| — | |
| (7,940) | |
| — | |
| — | |
| — | |
| (1,349,380) |
Issuances | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (24,376) | |
| (24,376) |
Cash repayments / receipts | |
| (106,037) | |
| (12,563) | |
| (564) | |
| — | |
| — | |
| (9,260) | |
| (128,424) |
Transfers into Level III | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (757,207) | |
| (757,207) |
Transfers out of Level III | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 1,132,205 | |
| 1,132,205 |
Consolidation of VIEs | |
| — | |
| — | |
| — | |
| — | |
| 3,077,357 | |
| (71,095) | |
| 3,006,262 |
June 30, 2020 balance | | $ | 894,613 | | $ | 174,281 | | $ | 21,891 | | $ | 13,955 | | $ | 64,175,387 | | $ | (2,129,529) | | $ | 63,150,598 |
Amount of unrealized gains (losses) attributable to assets still held at June 30, 2020: | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | $ | 1,589 | | $ | 5,334 | | $ | (999) | | $ | (2,962) | | $ | (1,089,145) | | $ | 137,596 | | $ | (948,587) |
Included in OCI | | $ | — | | $ | (8,066) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (8,066) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Domestic |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
|
| Loans |
|
|
|
|
|
|
| Servicing |
|
|
|
| VIE |
|
|
| ||||||||||||||||||||||||
Nine Months Ended September 30, 2017 |
| Held‑for‑sale |
| RMBS |
| CMBS |
| Rights |
| VIE Assets |
| Liabilities |
| Total | ||||||||||||||||||||||||||||
January 1, 2017 balance |
| $ | 63,279 |
| $ | 253,915 |
| $ | 31,546 |
| $ | 55,082 |
| $ | 67,123,261 |
| $ | (2,585,369) |
| $ | 64,941,714 | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
|
| | |
| | |
| | |
| Domestic |
| | |
| | |
| | | ||||||||||||||||||||||
| | Loans at | | | | | | | | Servicing | | | | | VIE | | | | ||||||||||||||||||||||||
Six Months Ended June 30, 2019 | | Fair Value | | RMBS | | CMBS | | Rights | | VIE Assets | | Liabilities | | Total | ||||||||||||||||||||||||||||
January 1, 2019 balance | | $ | 671,282 | | $ | 209,079 | | $ | 25,228 | | $ | 20,557 | | $ | 53,446,364 | | $ | (1,441,446) | | $ | 52,931,064 | |||||||||||||||||||||
Total realized and unrealized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Change in fair value / gain on sale |
|
| 45,484 |
|
| — |
|
| (4,359) |
|
| (21,301) |
|
| (15,773,529) |
|
| 749,757 |
|
| (15,003,948) | |
| 33,157 | |
| — | |
| 721 | |
| (1,683) | |
| 420,934 | |
| 37,449 | |
| 490,578 |
OTTI |
|
| — |
|
| (109) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (109) | |||||||||||||||||||||
Net accretion |
|
| — |
|
| 10,375 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,375 | |
| — | |
| 5,038 | |
| — | |
| — | |
| — | |
| — | |
| 5,038 |
Included in OCI |
|
| — |
|
| 10,728 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 10,728 | |
| — | |
| (466) | |
| — | |
| — | |
| — | |
| — | |
| (466) |
Purchases / Originations |
|
| 1,527,364 |
|
| 7,433 |
|
| 11,798 |
|
| — |
|
| — |
|
| — |
|
| 1,546,595 | | | 1,652,234 | |
| — | |
| — | |
| — | |
| — | |
| — | | | 1,652,234 |
Sales |
|
| (987,828) |
|
| — |
|
| (11,134) |
|
| — |
|
| — |
|
| — |
|
| (998,962) | |
| (928,747) | |
| — | |
| (3,978) | |
| — | |
| — | |
| — | |
| (932,725) |
Issuances |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (11,657) |
|
| (11,657) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (58,723) | |
| (58,723) |
Cash repayments / receipts |
|
| (39,675) |
|
| (29,090) |
|
| (8,754) |
|
| — |
|
| — |
|
| (40,946) |
|
| (118,465) | | | (55,528) | |
| (12,777) | |
| (5,590) | |
| — | |
| — | |
| (3,270) | |
| (77,165) |
Transfers into Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (616,794) |
|
| (616,794) | |
| — | |
| — | |
| 5,350 | |
| — | |
| — | |
| (1,265,141) | |
| (1,259,791) |
Transfers out of Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 231,012 |
|
| 231,012 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 430,819 | |
| 430,819 |
Consolidation of VIEs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2,092,516 |
|
| (75,585) |
|
| 2,016,931 | |
| — | |
| — | |
| — | |
| — | |
| 4,104,135 | |
| (107,850) | |
| 3,996,285 |
Deconsolidation of VIEs |
|
| — |
|
| — |
|
| 4,744 |
|
| — |
|
| (2,244,267) |
|
| 89,799 |
|
| (2,149,724) | |
| — | |
| — | |
| 12,552 | |
| — | |
| (303,827) | |
| 34,160 | |
| (257,115) |
September 30, 2017 balance |
| $ | 608,624 |
| $ | 253,252 |
| $ | 23,841 |
| $ | 33,781 |
| $ | 51,197,981 |
| $ | (2,259,783) |
| $ | 49,857,696 | |||||||||||||||||||||
Amount of total (losses) gains included in earnings attributable to assets still held at September 30, 2017 |
| $ | (2,621) |
| $ | 10,159 |
| $ | 56 |
| $ | (21,301) |
| $ | (15,773,529) |
| $ | 749,757 |
| $ | (15,037,479) | |||||||||||||||||||||
June 30, 2019 balance | | $ | 1,372,398 | | $ | 200,874 | | $ | 34,283 | | $ | 18,874 | | $ | 57,667,606 | | $ | (2,374,002) | | $ | 56,920,033 | |||||||||||||||||||||
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2019 | | $ | 5,145 | | $ | 5,038 | | $ | (157) | | $ | (1,683) | | $ | 420,934 | | $ | 37,449 | | $ | 466,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Domestic |
|
|
|
|
|
|
|
|
| |
|
| Loans |
|
|
|
|
|
|
| Servicing |
|
|
|
| VIE |
|
|
| |||
Nine Months Ended September 30, 2016 |
| Held‑for‑sale |
| RMBS |
| CMBS |
| Rights |
| VIE Assets |
| Liabilities |
| Total | |||||||
January 1, 2016 balance |
| $ | 203,865 |
| $ | 176,224 |
| $ | 212,981 |
| $ | 119,698 |
| $ | 76,675,689 |
| $ | (2,552,448) |
| $ | 74,836,009 |
Impact of ASU 2015-02 adoption (1) |
|
| — |
|
| — |
|
| — |
|
| (17,467) |
|
| 17,467 |
|
| — |
|
| — |
Total realized and unrealized gains (losses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value / gain on sale |
|
| 70,122 |
|
| — |
|
| (677) |
|
| (33,213) |
|
| (16,483,798) |
|
| 946,703 |
|
| (15,500,863) |
Net accretion |
|
| — |
|
| 11,354 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 11,354 |
Included in OCI |
|
| — |
|
| 8,656 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 8,656 |
Purchases / Originations |
|
| 1,197,801 |
|
| 97,204 |
|
| 57,576 |
|
| — |
|
| — |
|
| — |
|
| 1,352,581 |
Sales |
|
| (1,123,512) |
|
| — |
|
| (18,725) |
|
| — |
|
| — |
|
| — |
|
| (1,142,237) |
Issuances |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (596) |
|
| (596) |
Cash repayments / receipts |
|
| (786) |
|
| (32,925) |
|
| (31,734) |
|
| — |
|
| — |
|
| 28,591 |
|
| (36,854) |
Transfers into Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (972,588) |
|
| (972,588) |
Transfers out of Level III |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 187,683 |
|
| 187,683 |
Consolidation of VIEs |
|
| — |
|
| — |
|
| (162,745) |
|
| — |
|
| 19,118,645 |
|
| (593,818) |
|
| 18,362,082 |
Deconsolidation of VIEs |
|
| — |
|
| — |
|
| 2,109 |
|
| — |
|
| (5,404,304) |
|
| 44,976 |
|
| (5,357,219) |
September 30, 2016 balance |
| $ | 347,490 |
| $ | 260,513 |
| $ | 58,785 |
| $ | 69,018 |
| $ | 73,923,699 |
| $ | (2,911,497) |
| $ | 71,748,008 |
Amount of total gains (losses) included in earnings attributable to assets still held at September 30, 2016 |
| $ | 9,746 |
| $ | 11,354 |
| $ | 263 |
| $ | (33,213) |
| $ | (16,483,798) |
| $ | 946,703 |
| $ | (15,548,945) |
|
|
Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.
52
The following table presents the fair values, all of which are classified in Level III of the fair value hierarchy, of our financial instruments not carried at fair value on the condensed consolidated balance sheets (amounts in thousands):
| | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 | ||||||||
|
| Carrying |
| Fair | | Carrying |
| Fair | ||||
| | Value | | Value | | Value | | Value | ||||
Financial assets not carried at fair value: | | | | | | | | | | | | |
Loans held-for-investment and loans held-for-sale | | $ | 10,197,948 | | $ | 10,096,859 | | $ | 10,034,030 | | $ | 10,086,372 |
HTM debt securities | |
| 544,423 | |
| 512,493 | |
| 570,638 | |
| 568,727 |
Financial liabilities not carried at fair value: | | | | | | | | | | | | |
Secured financing agreements and CLO | | $ | 9,765,627 | | $ | 9,663,737 | | $ | 9,834,108 | | $ | 9,826,511 |
Unsecured senior notes | |
| 1,932,560 | |
| 1,873,867 | |
| 1,928,622 | |
| 2,022,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair | ||||
|
| Value |
| Value |
| Value |
| Value | ||||
Financial assets not carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-investment and loans transferred as secured borrowings |
| $ | 6,456,710 |
| $ | 6,539,259 |
| $ | 5,882,995 |
| $ | 5,934,219 |
HTM securities |
|
| 411,196 |
|
| 408,442 |
|
| 509,980 |
|
| 504,165 |
Financial liabilities not carried at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Secured financing agreements and secured borrowings on transferred loans |
| $ | 5,588,895 |
| $ | 5,559,888 |
| $ | 4,189,126 |
| $ | 4,198,136 |
Unsecured senior notes |
|
| 2,044,523 |
|
| 2,097,835 |
|
| 2,011,544 |
|
| 2,088,374 |
54
The following is quantitative information about significant unobservable inputs in our Level III measurements for those assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
| | | | | | | | | | | |
| | Carrying Value at | | Valuation | | Unobservable | | Range (Weighted Average) as of (1) | |||
|
| June 30, 2020 |
| Technique |
| Input |
| June 30, 2020 |
| December 31, 2019 | |
Loans under fair value option | | $ | 894,613 | | Discounted cash flow | | Yield (b) | | 2.9% - 8.9% (4.8%) | | 3.4% - 5.9% |
| | | | | | | Duration (c) | | 1.5 - 11.2 years (5.1 years) | | 1.3 - 11.3 years |
RMBS | |
| 174,281 | | Discounted cash flow | | Constant prepayment rate (a) | | 3.2% - 16.4% (7.3%) | | 3.1% - 24.9% |
| | | | | | | Constant default rate (b) | | 1.3% - 5.0% (2.6%) | | 0.5% - 5.0% |
| | | | | | | Loss severity (b) | | 0% - 79% (27%) (e) | | 0% - 93% (e) |
| | | | | | | Delinquency rate (c) | | 8% - 28% (18%) | | 5% - 29% |
| | | | | | | Servicer advances (a) | | 24% - 85% (61%) | | 27% - 85% |
| | | | | | | Annual coupon deterioration (b) | | 0% - 0.9% (0.1%) | | 0% - 1.6% |
| | | | | | | Putback amount per projected total collateral loss (d) | | 0% - 25% (2.7%) | | 0% - 28% |
CMBS | |
| 21,891 | | Discounted cash flow | | Yield (b) | | 0% - 180.5% (5.5%) | | 0% - 122.9% |
| | | | | | | Duration (c) | | 0 - 6.7 years (3.5 years) | | 0 - 9.7 years |
Domestic servicing rights | |
| 13,955 | | Discounted cash flow | | Debt yield (a) | | 7.75% (7.75%) | | 7.50% |
| | | | | | | Discount rate (b) | | 15% (15%) | | 15% |
VIE assets | |
| 64,175,387 | | Discounted cash flow | | Yield (b) | | 0% - 866.4% (14.5%) | | 0% - 690.7% |
| | | | | | | Duration (c) | | 0 - 18.1 years (4.1 years) | | 0 - 19.2 years |
VIE liabilities | |
| (2,129,529) | | Discounted cash flow | | Yield (b) | | 0% - 866.4% (14.6%) | | 0% - 690.7% |
| | | | | | | Duration (c) | | 0 - 11.3 years (4.1 years) | | 0 - 12.7 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Carrying Value at |
| Valuation |
| Unobservable |
| Range as of (1) | |||
|
| September 30, 2017 |
| Technique |
| Input |
| September 30, 2017 |
| December 31, 2016 | |
Loans held-for-sale, fair value option |
| $ | 608,624 |
| Discounted cash flow |
| Yield (b) |
| 4.3% - 5.9% |
| 5.0% - 5.7% |
|
|
|
|
|
|
| Duration (c) |
| 3.3 - 12.8 years |
| 10.0 years |
RMBS |
|
| 253,252 |
| Discounted cash flow |
| Constant prepayment rate (a) |
| 2.4% - 19.4% |
| 2.8% - 17.0% |
|
|
|
|
|
|
| Constant default rate (b) |
| 0.8% - 5.8% |
| 1.1% - 8.1% |
|
|
|
|
|
|
| Loss severity (b) |
| 16% - 79% (e) |
| 12% - 79% (e) |
|
|
|
|
|
|
| Delinquency rate (c) |
| 4% - 34% |
| 2% - 29% |
|
|
|
|
|
|
| Servicer advances (a) |
| 20% - 84% |
| 23% - 94% |
|
|
|
|
|
|
| Annual coupon deterioration (b) |
| 0% - 0.8% |
| 0% - 0.6% |
|
|
|
|
|
|
| Putback amount per projected total collateral loss (d) |
| 0% - 15% |
| 0% - 15% |
CMBS |
|
| 23,841 |
| Discounted cash flow |
| Yield (b) |
| 0% - 167.1% |
| 0% - 172.0% |
|
|
|
|
|
|
| Duration (c) |
| 0 - 9.9 years |
| 0 - 18.7 years |
Domestic servicing rights |
|
| 33,781 |
| Discounted cash flow |
| Debt yield (a) |
| 7.75% |
| 7.75% |
|
|
|
|
|
|
| Discount rate (b) |
| 15% |
| 15% |
|
|
|
|
|
|
| Control migration (b) |
| 0% - 80% |
| 0% - 80% |
VIE assets |
|
| 51,197,981 |
| Discounted cash flow |
| Yield (b) |
| 0% - 813.9% |
| 0% - 960.4% |
|
|
|
|
|
|
| Duration (c) |
| 0 - 11.6 years |
| 0 - 12.0 years |
VIE liabilities |
|
| 2,259,783 |
| Discounted cash flow |
| Yield (b) |
| 0% - 813.9% |
| 0% - 960.4% |
|
|
|
|
|
|
| Duration (c) |
| 0 - 11.6 years |
| 0 - 12.0 years |
(1) |
| The ranges and weighted averages of significant unobservable inputs are represented in percentages and years. Unobservable inputs were weighted by the relative carrying value of the instruments as of June 30, 2020. |
SensitivityInformation about Uncertainty of the Fair Value to Changes in the Unobservable InputsMeasurements
(a) |
| Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement. |
(b) |
| Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement. |
(c) |
| Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (higher or lower) fair value measurement depending on the structural features of the security in question. |
(d) |
| Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our RMBS portfolio. |
(e) |
|
53
Certain of our domestic subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.
Our TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing commercial mortgage loans, and investing in entities which engage in real estate relatedestate-related operations. The majority of our TRSs are held within the Investing and Servicing Segment. As of SeptemberJune 30, 20172020 and December 31, 2016,2019, approximately $779.8 million$1.0 billion and $634.4 million,$1.6 billion, respectively, of assets including $139.4 million and $181.0 million in cash, respectively, were owned by TRS entities. Our TRSs are not consolidated for U.S. federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.
55
The following table is a reconciliation of our U.S. federal income tax (benefit) provision determined using our statutory federal tax rate to our reported income tax (benefit) provision for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
| 2016 | ||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||
|
| For the Three Months Ended June 30, |
| For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||
| | 2020 | |
| 2019 |
|
| 2020 | | 2019 | ||||||||||||||||||||||||||||||||||||||
Federal statutory tax rate |
| $ | 35,915 |
| 35.0 | % |
| $ | 37,968 |
| 35.0 | % |
| $ | 118,010 |
| 35.0 | % |
| $ | 86,939 |
| 35.0 | % | | $ | 31,849 |
| 21.0 | % |
| $ | 28,556 |
| 21.0 | % |
| $ | 16,520 |
| 21.0 | % |
| $ | 44,692 |
| 21.0 | % |
REIT and other non-taxable income |
|
| (26,242) |
| (25.5) | % |
|
| (35,541) |
| (32.7) | % |
|
| (99,668) |
| (29.6) | % |
|
| (83,676) |
| (33.7) | % | ||||||||||||||||||||||||
REIT and other non-taxable loss | |
| (26,923) | | (17.8) | % | |
| (26,013) | | (19.1) | % | |
| (17,009) | | (21.6) | % | |
| (42,172) | | (19.8) | % | ||||||||||||||||||||||||
State income taxes |
|
| 200 |
| 0.2 | % |
|
| 247 |
| 0.2 | % |
|
| 81 |
| — | % |
|
| 224 |
| 0.1 | % | |
| 1,619 | | 1.1 | % | |
| 666 | | 0.5 | % | |
| (160) | | (0.2) | % | |
| 660 | | 0.3 | % |
Federal benefit of state tax deduction |
|
| (70) |
| (0.1) | % |
|
| (86) |
| (0.1) | % |
|
| (28) |
| — | % |
|
| (78) |
| — | % | |
| (340) | | (0.2) | % | |
| (140) | | (0.1) | % | |
| 34 | | — | % | |
| (139) | | (0.1) | % |
Net operating loss carryback rate differential | |
| (3,717) | | (2.5) | % | |
| — | | — | % | |
| (3,717) | | (4.7) | % | |
| — | | — | % | ||||||||||||||||||||||||
Intra-entity transfer | | | (3,781) | | (2.5) | % | | | — | | — | % | | | (3,781) | | (4.8) | % | | | — | | — | % | ||||||||||||||||||||||||
Other |
|
| 13 |
| — | % |
|
| 79 |
| 0.1 | % |
|
| (110) |
| — | % |
|
| 58 |
| — | % | |
| (5) | | — | % | |
| 464 | | 0.3 | % | |
| 86 | | 0.1 | % | |
| 826 | | 0.4 | % |
Effective tax rate |
| $ | 9,816 |
| 9.6 | % |
| $ | 2,667 |
| 2.5 | % |
| $ | 18,285 |
| 5.4 | % |
| $ | 3,467 |
| 1.4 | % | | $ | (1,298) | | (0.9) | % | | $ | 3,533 | | 2.6 | % | | $ | (8,027) | | (10.2) | % | | $ | 3,867 | | 1.8 | % |
During
The Company has used the three and nine months ended September 30, 2017, we recognized $28.2 million and $53.9 million, respectively,discrete tax approach in earnings from unconsolidated entities related to our interest in an investor entity which owns equity in an online real estate company (see Note 7). Our investment in this entity is held within a TRS. In calculating our effectivethe tax ratebenefit for the three and ninesix months ended SeptemberJune 30, 2017, these earnings were deemed2020 due to be both unusualthe fact that a relatively small change in naturethe Company’s projected pre-tax net income could result in a volatile effective tax rate. Under the discrete method, the Company determines its tax benefit based upon actual results as if the interim period was an annual period.
In response to the COVID-19 pandemic, the U.S. and infrequent in occurrence. As a result, pursuantmany other governments have enacted, or are contemplating enacting, measures to ASC 740,provide aid and economic stimulus. These measures include deferring the incomedue dates of tax effect of these earnings, net of the related Manager incentive fee, was excluded from ordinarypayments and other changes to their income and discretely calculated. This calculation resultednon-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws, and to allow companies to carry back tax net operating losses (“NOLs”) generated in 2018 to 2020 to the five preceding tax years. The Company plans to carry back its NOL generated this year to a year in which the federal tax rate was 35%, resulting in a discrete income tax provision of $8.4 million and $18.3 million in our condensed consolidated statements of operationsbenefit from the NOL carryback for the three and ninesix months ended SeptemberJune 30, 2017, respectively. 2020. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.
56
21. Commitments and ContingenciesContingencies
As of SeptemberJune 30, 2017, we2020, our Commercial and Residential Lending Segment had future commercial loan funding commitments on 51 loans totaling $1.5$2.0 billion, of which we expect to fund $1.3$1.9 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions.
During the three months ended June 30, 2020, we entered into a trade confirmation which would allow us to acquire $557.9 million unpaid principal balance of residential loans at a discount to the par amount of the loans. The closing date on all or a portion of these loans will be as mutually agreed between us and the seller.
As of June 30, 2020, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $272.7 million, including $139.8 million under revolvers and letters of credit (“LCs”), and $132.9 million under delayed draw term loans. As of June 30, 2020, $24.9 million of revolvers and LCs were outstanding.
In connection with the Infrastructure Lending Segment acquisition, we assumed guarantees of certain borrowers’ performance under existing interest rate swaps. As of June 30, 2020, we had 6 outstanding guarantees on interest rate swaps maturing between March 2022 and June 2025. Refer to Note 12 for further discussion.
Generally, funding commitments are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are made to the borrower.
Management is not aware of any other contractual obligations, legal proceedings, or any other contingent obligations incurred in the normal course of business that would have a material adverse effect on our condensed consolidated financial statements.
As of June 30, 2020, no contingencies have been recorded on our consolidated balance sheet as a result of COVID-19. However, if the global pandemic continues and the economic implications worsen, it may have long-term impacts on our financial condition, results of operations, and cash flows. Refer to Note 2 for further discussion of COVID-19.
| | | | | | |
54
57
In its operation of the business, management, including our chief operating decision maker, who is our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis prior to the impact of consolidating securitization VIEs under ASC 810. The segment information within this noteNote is reported on that basis.
55
The table below presents our results of operations for the three months ended September 30, 2017 by business segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing |
|
|
|
|
| Investing |
|
| |||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
| and Servicing |
|
| |||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Subtotal |
| VIEs |
| Total | |||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income from loans |
| $ | 134,149 |
| $ | — |
| $ | 4,450 |
| $ | — |
| $ | 138,599 |
| $ | — |
| $ | 138,599 |
Interest income from investment securities |
|
| 11,540 |
|
| — |
|
| 31,740 |
|
| — |
|
| 43,280 |
|
| (30,829) |
|
| 12,451 |
Servicing fees |
|
| 142 |
|
| — |
|
| 23,093 |
|
| — |
|
| 23,235 |
|
| (8,393) |
|
| 14,842 |
Rental income |
|
| — |
|
| 47,663 |
|
| 12,490 |
|
| — |
|
| 60,153 |
|
| — |
|
| 60,153 |
Other revenues |
|
| 181 |
|
| 164 |
|
| 441 |
|
| — |
|
| 786 |
|
| (64) |
|
| 722 |
Total revenues |
|
| 146,012 |
|
| 47,827 |
|
| 72,214 |
|
| — |
|
| 266,053 |
|
| (39,286) |
|
| 226,767 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees |
|
| 482 |
|
| — |
|
| 18 |
|
| 30,370 |
|
| 30,870 |
|
| 110 |
|
| 30,980 |
Interest expense |
|
| 27,929 |
|
| 11,360 |
|
| 5,710 |
|
| 31,709 |
|
| 76,708 |
|
| (277) |
|
| 76,431 |
General and administrative |
|
| 5,302 |
|
| 1,090 |
|
| 24,167 |
|
| 2,251 |
|
| 32,810 |
|
| 82 |
|
| 32,892 |
Acquisition and investment pursuit costs |
|
| 807 |
|
| 245 |
|
| (28) |
|
| — |
|
| 1,024 |
|
| — |
|
| 1,024 |
Costs of rental operations |
|
| — |
|
| 18,660 |
|
| 5,139 |
|
| — |
|
| 23,799 |
|
| — |
|
| 23,799 |
Depreciation and amortization |
|
| 17 |
|
| 17,852 |
|
| 5,002 |
|
| — |
|
| 22,871 |
|
| — |
|
| 22,871 |
Loan loss allowance, net |
|
| (171) |
|
| — |
|
| — |
|
| — |
|
| (171) |
|
| — |
|
| (171) |
Other expense |
|
| 72 |
|
| 97 |
|
| 207 |
|
| — |
|
| 376 |
|
| — |
|
| 376 |
Total costs and expenses |
|
| 34,438 |
|
| 49,304 |
|
| 40,215 |
|
| 64,330 |
|
| 188,287 |
|
| (85) |
|
| 188,202 |
Income (loss) before other income (loss), income taxes and non-controlling interests |
|
| 111,574 |
|
| (1,477) |
|
| 31,999 |
|
| (64,330) |
|
| 77,766 |
|
| (39,201) |
|
| 38,565 |
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net assets related to consolidated VIEs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 56,177 |
|
| 56,177 |
Change in fair value of servicing rights |
|
| — |
|
| — |
|
| (5,652) |
|
| — |
|
| (5,652) |
|
| 785 |
|
| (4,867) |
Change in fair value of investment securities, net |
|
| 276 |
|
| — |
|
| 13,962 |
|
| — |
|
| 14,238 |
|
| (14,635) |
|
| (397) |
Change in fair value of mortgage loans held-for-sale, net |
|
| (397) |
|
| — |
|
| 19,882 |
|
| — |
|
| 19,485 |
|
| — |
|
| 19,485 |
Earnings (loss) from unconsolidated entities |
|
| 848 |
|
| (33,731) |
|
| 30,225 |
|
| — |
|
| (2,658) |
|
| (2,031) |
|
| (4,689) |
Gain on sale of investments and other assets, net |
|
| — |
|
| — |
|
| 11,877 |
|
| — |
|
| 11,877 |
|
| — |
|
| 11,877 |
Loss on derivative financial instruments, net |
|
| (10,813) |
|
| (11,276) |
|
| (2,135) |
|
| — |
|
| (24,224) |
|
| — |
|
| (24,224) |
Foreign currency gain (loss), net |
|
| 10,657 |
|
| (1) |
|
| 4 |
|
| — |
|
| 10,660 |
|
| — |
|
| 10,660 |
Other income, net |
|
| — |
|
| — |
|
| 28 |
|
| — |
|
| 28 |
|
| — |
|
| 28 |
Total other income (loss) |
|
| 571 |
|
| (45,008) |
|
| 68,191 |
|
| — |
|
| 23,754 |
|
| 40,296 |
|
| 64,050 |
Income (loss) before income taxes |
|
| 112,145 |
|
| (46,485) |
|
| 100,190 |
|
| (64,330) |
|
| 101,520 |
|
| 1,095 |
|
| 102,615 |
Income tax benefit (provision) |
|
| 11 |
|
| — |
|
| (9,827) |
|
| — |
|
| (9,816) |
|
| — |
|
| (9,816) |
Net income (loss) |
|
| 112,156 |
|
| (46,485) |
|
| 90,363 |
|
| (64,330) |
|
| 91,704 |
|
| 1,095 |
|
| 92,799 |
Net income attributable to non-controlling interests |
|
| (357) |
|
| — |
|
| (2,919) |
|
| — |
|
| (3,276) |
|
| (1,095) |
|
| (4,371) |
Net income (loss) attributable to Starwood Property Trust, Inc. |
| $ | 111,799 |
| $ | (46,485) |
| $ | 87,444 |
| $ | (64,330) |
| $ | 88,428 |
| $ | — |
| $ | 88,428 |
56
The table below presents our results of operations for the three months ended SeptemberJune 30, 20162020 by business segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
|
| Investing |
|
|
|
|
| |||||||||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
|
| and Servicing |
|
|
|
|
| |||||||||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Subtotal |
| VIEs |
| Total |
|
| |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||
| | Commercial and | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | | | | | |||||||||||||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | | Securitization | | | |||||||||||||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Subtotal | | VIEs | | Total | |||||||||||||||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest income from loans |
| $ | 114,506 |
| $ | — |
| $ | 6,719 |
| $ | — |
| $ | 121,225 |
| $ | — |
| $ | 121,225 |
|
| | $ | 150,136 | | $ | 19,126 | | $ | — | | $ | 1,841 | | $ | — | | $ | 171,103 | | $ | — | | $ | 171,103 |
Interest income from investment securities |
|
| 13,301 |
|
| — |
|
| 35,274 |
|
| — |
|
| 48,575 |
|
| (29,400) |
|
| 19,175 |
|
| |
| 17,345 | |
| 683 | |
| — | |
| 24,924 | | | — | |
| 42,952 | |
| (28,308) | |
| 14,644 |
Servicing fees |
|
| 195 |
|
| — |
|
| 37,678 |
|
| — |
|
| 37,873 |
|
| (14,955) |
|
| 22,918 |
|
| |
| 142 | |
| — | |
| — | |
| 8,591 | | | — | |
| 8,733 | |
| (2,075) | |
| 6,658 |
Rental income |
|
| — |
|
| 29,226 |
|
| 10,516 |
|
| — |
|
| 39,742 |
|
| — |
|
| 39,742 |
|
| | | 690 | | | — | | | 63,566 | | | 8,454 | | | — | | | 72,710 | | | — | | | 72,710 |
Other revenues |
|
| 99 |
|
| 11 |
|
| 1,692 |
|
| — |
|
| 1,802 |
|
| (157) |
|
| 1,645 |
|
| |
| 54 | |
| 100 | |
| 58 | |
| 280 | | | — | |
| 492 | |
| (1) | |
| 491 |
Total revenues |
|
| 128,101 |
|
| 29,237 |
|
| 91,879 |
|
| — |
|
| 249,217 |
|
| (44,512) |
|
| 204,705 |
|
| |
| 168,367 | |
| 19,909 | |
| 63,624 | |
| 44,090 | |
| — | |
| 295,990 | |
| (30,384) | |
| 265,606 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Management fees |
|
| 525 |
|
| — |
|
| 24 |
|
| 27,183 |
|
| 27,732 |
|
| 48 |
|
| 27,780 |
|
| |
| 339 | |
| — | |
| — | |
| 220 | |
| 22,554 | |
| 23,113 | |
| 2 | |
| 23,115 |
Interest expense |
|
| 22,678 |
|
| 5,536 |
|
| 4,877 |
|
| 26,181 |
|
| 59,272 |
|
| (190) |
|
| 59,082 |
|
| |
| 41,871 | |
| 9,678 | |
| 15,942 | |
| 6,177 | | | 27,825 | |
| 101,493 | |
| — | |
| 101,493 |
General and administrative |
|
| 5,067 |
|
| 867 |
|
| 43,711 |
|
| 1,651 |
|
| 51,296 |
|
| 174 |
|
| 51,470 |
|
| |
| 8,615 | |
| 4,337 | |
| 1,281 | |
| 14,993 | | | 3,368 | |
| 32,594 | |
| 83 | |
| 32,677 |
Acquisition and investment pursuit costs |
|
| 322 |
|
| 759 |
|
| 416 |
|
| 12 |
|
| 1,509 |
|
| — |
|
| 1,509 |
|
| |
| 578 | |
| 1,100 | |
| — | |
| (88) | | | — | |
| 1,590 | |
| — | |
| 1,590 |
Costs of rental operations |
|
| — |
|
| 13,139 |
|
| 4,872 |
|
| — |
|
| 18,011 |
|
| — |
|
| 18,011 |
|
| | | 988 | | | — | | | 24,703 | | | 3,941 | | | — | | | 29,632 | | | — | | | 29,632 |
Depreciation and amortization |
|
| — |
|
| 10,870 |
|
| 4,482 |
|
| — |
|
| 15,352 |
|
| — |
|
| 15,352 |
|
| |
| 430 | |
| 89 | |
| 19,153 | |
| 3,749 | | | — | |
| 23,421 | |
| — | |
| 23,421 |
Loan loss allowance, net |
|
| 2,127 |
|
| — |
|
| — |
|
| — |
|
| 2,127 |
|
| — |
|
| 2,127 |
|
| ||||||||||||||||||||||||
Credit loss provision, net | |
| 11,294 | |
| (1,092) | |
| — | |
| — | | | — | |
| 10,202 | |
| — | |
| 10,202 | |||||||||||||||||||||||
Other expense |
|
| — |
|
| 513 |
|
| 198 |
|
| — |
|
| 711 |
|
| — |
|
| 711 |
|
| |
| 76 | |
| — | |
| 26 | |
| — | | | — | |
| 102 | |
| — | |
| 102 |
Total costs and expenses |
|
| 30,719 |
|
| 31,684 |
|
| 58,580 |
|
| 55,027 |
|
| 176,010 |
|
| 32 |
|
| 176,042 |
|
| |
| 64,191 | |
| 14,112 | |
| 61,105 | |
| 28,992 | | | 53,747 | |
| 222,147 | |
| 85 | |
| 222,232 |
Income (loss) before other income (loss), income taxes and non-controlling interests |
|
| 97,382 |
|
| (2,447) |
|
| 33,299 |
|
| (55,027) |
|
| 73,207 |
|
| (44,544) |
|
| 28,663 |
|
| ||||||||||||||||||||||||
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in net assets related to consolidated VIEs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 47,848 |
|
| 47,848 |
|
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 51,261 | |
| 51,261 |
Change in fair value of servicing rights |
|
| — |
|
| — |
|
| (14,006) |
|
| — |
|
| (14,006) |
|
| (277) |
|
| (14,283) |
|
| |
| — | |
| — | |
| — | |
| 5,328 | | | — | |
| 5,328 | |
| (7,897) | |
| (2,569) |
Change in fair value of investment securities, net |
|
| 207 |
|
| — |
|
| 620 |
|
| — |
|
| 827 |
|
| (3,613) |
|
| (2,786) |
|
| |
| 5,454 | |
| — | |
| — | |
| 7,941 | | | — | |
| 13,395 | |
| (12,568) | |
| 827 |
Change in fair value of mortgage loans held-for-sale, net |
|
| — |
|
| — |
|
| 49,996 |
|
| — |
|
| 49,996 |
|
| — |
|
| 49,996 |
|
| ||||||||||||||||||||||||
Earnings from unconsolidated entities |
|
| 852 |
|
| 2,455 |
|
| 617 |
|
| — |
|
| 3,924 |
|
| 381 |
|
| 4,305 |
|
| ||||||||||||||||||||||||
Gain on sale of investments and other assets, net |
|
| 10 |
|
| — |
|
| — |
|
| — |
|
| 10 |
|
| — |
|
| 10 |
|
| ||||||||||||||||||||||||
Gain (loss) on derivative financial instruments, net |
|
| 4,982 |
|
| (4,720) |
|
| (2,590) |
|
| — |
|
| (2,328) |
|
| — |
|
| (2,328) |
|
| ||||||||||||||||||||||||
Foreign currency (loss) gain, net |
|
| (3,839) |
|
| (7) |
|
| 632 |
|
| — |
|
| (3,214) |
|
| — |
|
| (3,214) |
|
| ||||||||||||||||||||||||
Change in fair value of mortgage loans, net | |
| 33,010 | |
| — | |
| — | |
| 1,440 | | | — | |
| 34,450 | |
| — | |
| 34,450 | |||||||||||||||||||||||
Earnings (loss) from unconsolidated entities | |
| 671 | |
| (1,118) | |
| — | |
| 29,526 | | | — | |
| 29,079 | |
| (303) | |
| 28,776 | |||||||||||||||||||||||
(Loss) gain on sale of investments and other assets, net | |
| (961) | |
| — | |
| — | |
| 7,433 | | | — | |
| 6,472 | |
| — | |
| 6,472 | |||||||||||||||||||||||
(Loss) gain on derivative financial instruments, net | |
| (11,736) | |
| (437) | |
| (4,614) | |
| (3,828) | | | 4,517 | |
| (16,098) | |
| — | |
| (16,098) | |||||||||||||||||||||||
Foreign currency gain (loss), net | |
| 6,942 | |
| 310 | |
| (48) | |
| (31) | | | — | |
| 7,173 | |
| — | |
| 7,173 | |||||||||||||||||||||||
Loss on extinguishment of debt | | | (22) | | | — | | | (2,185) | | | — | | | — | | | (2,207) | | | — | | | (2,207) | |||||||||||||||||||||||
Other income, net |
|
| — |
|
| — |
|
| 35 |
|
| 234 |
|
| 269 |
|
| — |
|
| 269 |
|
| |
| — | |
| — | |
| 191 | |
| 13 | | | — | |
| 204 | |
| — | |
| 204 |
Total other income (loss) |
|
| 2,212 |
|
| (2,272) |
|
| 35,304 |
|
| 234 |
|
| 35,478 |
|
| 44,339 |
|
| 79,817 |
|
| |
| 33,358 | |
| (1,245) | |
| (6,656) | |
| 47,822 | | | 4,517 | |
| 77,796 | |
| 30,493 | |
| 108,289 |
Income (loss) before income taxes |
|
| 99,594 |
|
| (4,719) |
|
| 68,603 |
|
| (54,793) |
|
| 108,685 |
|
| (205) |
|
| 108,480 |
|
| |
| 137,534 | |
| 4,552 | |
| (4,137) | |
| 62,920 | | | (49,230) | |
| 151,639 | |
| 24 | |
| 151,663 |
Income tax provision |
|
| — |
|
| — |
|
| (2,667) |
|
| — |
|
| (2,667) |
|
| — |
|
| (2,667) |
|
| ||||||||||||||||||||||||
Income tax (provision) benefit | |
| (3,257) | |
| (56) | |
| — | |
| 4,611 | | | — | |
| 1,298 | |
| — | |
| 1,298 | |||||||||||||||||||||||
Net income (loss) |
|
| 99,594 |
|
| (4,719) |
|
| 65,936 |
|
| (54,793) |
|
| 106,018 |
|
| (205) |
|
| 105,813 |
|
| |
| 134,277 | |
| 4,496 | |
| (4,137) | |
| 67,531 | | | (49,230) | |
| 152,937 | |
| 24 | |
| 152,961 |
Net (income) loss attributable to non-controlling interests |
|
| (352) |
|
| — |
|
| 100 |
|
| — |
|
| (252) |
|
| 205 |
|
| (47) |
|
| ||||||||||||||||||||||||
Net income attributable to non-controlling interests | |
| (4) | |
| — | |
| (5,111) | |
| (8,166) | | | — | |
| (13,281) | |
| (24) | |
| (13,305) | |||||||||||||||||||||||
Net income (loss) attributable to Starwood Property Trust, Inc. |
| $ | 99,242 |
| $ | (4,719) |
| $ | 66,036 |
| $ | (54,793) |
| $ | 105,766 |
| $ | — |
| $ | 105,766 |
|
| | $ | 134,273 | | $ | 4,496 | | $ | (9,248) | | $ | 59,365 | | $ | (49,230) | | $ | 139,656 | | $ | — | | $ | 139,656 |
5758
The table below presents our results of operations for the ninethree months ended SeptemberJune 30, 20172019 by business segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
| Investing |
|
| |||||||||||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
| and Servicing |
|
| |||||||||||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Subtotal |
| VIEs |
| Total | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
| | Commercial and | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | | | | | |||||||||||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | | Securitization | | | |||||||||||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Subtotal | | VIEs | | Total | |||||||||||||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest income from loans |
| $ | 360,188 |
| $ | — |
| $ | 10,906 |
| $ | — |
| $ | 371,094 |
| $ | — |
| $ | 371,094 | | $ | 163,071 | | $ | 25,291 | | $ | — | | $ | 3,104 | | $ | — | | $ | 191,466 | | $ | — | | $ | 191,466 |
Interest income from investment securities |
|
| 35,870 |
|
| — |
|
| 104,768 |
|
| — |
|
| 140,638 |
|
| (100,593) |
|
| 40,045 | |
| 24,367 | | | 868 | |
| — | |
| 31,163 | | | — | |
| 56,398 | |
| (33,853) | |
| 22,545 |
Servicing fees |
|
| 568 |
|
| — |
|
| 86,837 |
|
| — |
|
| 87,405 |
|
| (39,833) |
|
| 47,572 | |
| 90 | | | — | |
| — | |
| 15,880 | | | — | |
| 15,970 | |
| (6,962) | |
| 9,008 |
Rental income |
|
| — |
|
| 138,795 |
|
| 37,366 |
|
| — |
|
| 176,161 |
|
| — |
|
| 176,161 | | | — | | | — | | | 72,326 | | | 14,971 | | | — | |
| 87,297 | |
| — | |
| 87,297 |
Other revenues |
|
| 553 |
|
| 430 |
|
| 1,450 |
|
| — |
|
| 2,433 |
|
| (249) |
|
| 2,184 | |
| 252 | | | 7 | |
| 88 | |
| 515 | | | 6 | |
| 868 | |
| (3) | |
| 865 |
Total revenues |
|
| 397,179 |
|
| 139,225 |
|
| 241,327 |
|
| — |
|
| 777,731 |
|
| (140,675) |
|
| 637,056 | |
| 187,780 | | | 26,166 | |
| 72,414 | |
| 65,633 | |
| 6 | |
| 351,999 | |
| (40,818) | |
| 311,181 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Management fees |
|
| 1,405 |
|
| — |
|
| 54 |
|
| 78,328 |
|
| 79,787 |
|
| 210 |
|
| 79,997 | |
| 353 | | | — | |
| — | |
| 18 | |
| 22,107 | |
| 22,478 | |
| 45 | |
| 22,523 |
Interest expense |
|
| 72,372 |
|
| 32,466 |
|
| 14,924 |
|
| 94,667 |
|
| 214,429 |
|
| (821) |
|
| 213,608 | |
| 58,564 | | | 16,258 | |
| 19,132 | |
| 8,515 | | | 27,821 | |
| 130,290 | |
| (164) | |
| 130,126 |
General and administrative |
|
| 14,872 |
|
| 3,471 |
|
| 69,536 |
|
| 7,719 |
|
| 95,598 |
|
| 243 |
|
| 95,841 | |
| 6,754 | | | 4,830 | |
| 1,706 | |
| 20,177 | | | 4,019 | |
| 37,486 | |
| 92 | |
| 37,578 |
Acquisition and investment pursuit costs |
|
| 1,707 |
|
| 516 |
|
| 9 |
|
| — |
|
| 2,232 |
|
| — |
|
| 2,232 | |
| 160 | | | 14 | |
| — | |
| (100) | | | — | |
| 74 | |
| — | |
| 74 |
Costs of rental operations |
|
| — |
|
| 51,843 |
|
| 15,858 |
|
| — |
|
| 67,701 |
|
| — |
|
| 67,701 | | | 741 | | | — | | | 23,125 | | | 6,789 | | | — | |
| 30,655 | |
| — | |
| 30,655 |
Depreciation and amortization |
|
| 50 |
|
| 52,288 |
|
| 14,793 |
|
| — |
|
| 67,131 |
|
| — |
|
| 67,131 | |
| 285 | | | — | |
| 23,076 | |
| 5,191 | | | — | |
| 28,552 | |
| — | |
| 28,552 |
Loan loss allowance, net |
|
| (3,170) |
|
| — |
|
| — |
|
| — |
|
| (3,170) |
|
| — |
|
| (3,170) | ||||||||||||||||||||||||
Credit loss provision, net | |
| 2,096 | | | 422 | |
| — | |
| — | | | — | |
| 2,518 | |
| — | |
| 2,518 | |||||||||||||||||||||
Other expense |
|
| 72 |
|
| 63 |
|
| 1,141 |
|
| — |
|
| 1,276 |
|
| — |
|
| 1,276 | |
| 76 | | | — | |
| 1,173 | |
| 194 | | | — | |
| 1,443 | |
| — | |
| 1,443 |
Total costs and expenses |
|
| 87,308 |
|
| 140,647 |
|
| 116,315 |
|
| 180,714 |
|
| 524,984 |
|
| (368) |
|
| 524,616 | |
| 69,029 | | | 21,524 | |
| 68,212 | |
| 40,784 | | | 53,947 | |
| 253,496 | |
| (27) | |
| 253,469 |
Income (loss) before other income (loss), income taxes and non-controlling interests |
|
| 309,871 |
|
| (1,422) |
|
| 125,012 |
|
| (180,714) |
|
| 252,747 |
|
| (140,307) |
|
| 112,440 | ||||||||||||||||||||||||
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Change in net assets related to consolidated VIEs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 203,108 |
|
| 203,108 | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 55,158 | |
| 55,158 |
Change in fair value of servicing rights |
|
| — |
|
| — |
|
| (28,956) |
|
| — |
|
| (28,956) |
|
| 7,655 |
|
| (21,301) | |
| — | | | — | |
| — | |
| (1,159) | | | — | |
| (1,159) | |
| 243 | |
| (916) |
Change in fair value of investment securities, net |
|
| 299 |
|
| — |
|
| 45,263 |
|
| — |
|
| 45,562 |
|
| (49,623) |
|
| (4,061) | |
| (948) | | | — | |
| — | |
| 15,815 | | | — | |
| 14,867 | |
| (14,200) | |
| 667 |
Change in fair value of mortgage loans held-for-sale, net |
|
| (549) |
|
| — |
|
| 46,033 |
|
| — |
|
| 45,484 |
|
| — |
|
| 45,484 | ||||||||||||||||||||||||
Earnings (loss) from unconsolidated entities |
|
| 2,548 |
|
| (28,782) |
|
| 67,134 |
|
| — |
|
| 40,900 |
|
| (13,137) |
|
| 27,763 | ||||||||||||||||||||||||
(Loss) gain on sale of investments and other assets, net |
|
| (59) |
|
| 77 |
|
| 16,986 |
|
| — |
|
| 17,004 |
|
| — |
|
| 17,004 | ||||||||||||||||||||||||
Loss on derivative financial instruments, net |
|
| (30,274) |
|
| (32,268) |
|
| (3,617) |
|
| — |
|
| (66,159) |
|
| — |
|
| (66,159) | ||||||||||||||||||||||||
Foreign currency gain, net |
|
| 28,402 |
|
| 16 |
|
| 16 |
|
| — |
|
| 28,434 |
|
| — |
|
| 28,434 | ||||||||||||||||||||||||
OTTI |
|
| (109) |
|
| — |
|
| — |
|
| — |
|
| (109) |
|
| — |
|
| (109) | ||||||||||||||||||||||||
Change in fair value of mortgage loans, net | |
| 5,363 | | | — | |
| — | |
| 16,528 | | | — | |
| 21,891 | |
| — | |
| 21,891 | |||||||||||||||||||||
Earnings from unconsolidated entities | |
| 5,492 | | | — | |
| 1,044 | |
| 2,754 | | | — | |
| 9,290 | |
| (473) | |
| 8,817 | |||||||||||||||||||||
Gain on sale of investments and other assets, net | |
| 239 | | | 2,276 | |
| — | |
| — | | | — | |
| 2,515 | |
| — | |
| 2,515 | |||||||||||||||||||||
Gain (loss) on derivative financial instruments, net | |
| 5,592 | | | (2,833) | |
| (11,147) | |
| (6,953) | | | 15,309 | |
| (32) | |
| — | |
| (32) | |||||||||||||||||||||
Foreign currency (loss) gain, net | |
| (6,927) | | | (83) | |
| (8) | |
| 1 | | | — | |
| (7,017) | |
| — | |
| (7,017) | |||||||||||||||||||||
Loss on extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| (5,916) |
|
| (5,916) |
|
| — |
|
| (5,916) | | | — | | | (2,816) | | | — | | | — | | | — | | | (2,816) | | | — | | | (2,816) |
Other income, net |
|
| — |
|
| — |
|
| 1,097 |
|
| — |
|
| 1,097 |
|
| (613) |
|
| 484 | ||||||||||||||||||||||||
Total other income (loss) |
|
| 258 |
|
| (60,957) |
|
| 143,956 |
|
| (5,916) |
|
| 77,341 |
|
| 147,390 |
|
| 224,731 | |
| 8,811 | | | (3,456) | |
| (10,111) | |
| 26,986 | | | 15,309 | |
| 37,539 | |
| 40,728 | |
| 78,267 |
Income (loss) before income taxes |
|
| 310,129 |
|
| (62,379) |
|
| 268,968 |
|
| (186,630) |
|
| 330,088 |
|
| 7,083 |
|
| 337,171 | |
| 127,562 | | | 1,186 | |
| (5,909) | |
| 51,835 | | | (38,632) | | | 136,042 | |
| (63) | |
| 135,979 |
Income tax provision |
|
| (331) |
|
| — |
|
| (17,954) |
|
| — |
|
| (18,285) |
|
| — |
|
| (18,285) | ||||||||||||||||||||||||
Income tax (provision) benefit | |
| (1,832) | | | 186 | | | — | |
| (1,887) | | | — | |
| (3,533) | |
| — | |
| (3,533) | |||||||||||||||||||||
Net income (loss) |
|
| 309,798 |
|
| (62,379) |
|
| 251,014 |
|
| (186,630) |
|
| 311,803 |
|
| 7,083 |
|
| 318,886 | |
| 125,730 | | | 1,372 | |
| (5,909) | |
| 49,948 | | | (38,632) | |
| 132,509 | |
| (63) | |
| 132,446 |
Net income attributable to non-controlling interests |
|
| (1,064) |
|
| — |
|
| (2,573) |
|
| — |
|
| (3,637) |
|
| (7,083) |
|
| (10,720) | |
| (21) | | | — | |
| (5,355) | |
| (117) | | | — | |
| (5,493) | |
| 63 | |
| (5,430) |
Net income (loss) attributable to Starwood Property Trust, Inc. |
| $ | 308,734 |
| $ | (62,379) |
| $ | 248,441 |
| $ | (186,630) |
| $ | 308,166 |
| $ | — |
| $ | 308,166 | | $ | 125,709 | | $ | 1,372 | | $ | (11,264) | | $ | 49,831 | | $ | (38,632) | | $ | 127,016 | | $ | — | | $ | 127,016 |
5859
The table below presents our results of operations for the ninesix months ended SeptemberJune 30, 20162020 by business segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
|
| Investing |
|
|
|
| ||||||||||||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
|
| and Servicing |
|
|
|
| ||||||||||||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Subtotal |
| VIEs |
| Total |
| ||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | Commercial and | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||
|
| Residential |
| Infrastructure |
| |
| Investing |
| |
| |
| |
| | |||||||||||||||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | | Securitization | | | |||||||||||||||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Subtotal | | VIEs | | Total | |||||||||||||||||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |||
Interest income from loans |
| $ | 348,460 |
| $ | — |
| $ | 12,854 |
| $ | — |
| $ | 361,314 |
| $ | — |
| $ | 361,314 |
| | $ | 342,517 | | $ | 41,539 | | $ | — | | $ | 4,474 | | $ | — | | $ | 388,530 | | $ | — | | $ | 388,530 | |||
Interest income from investment securities |
|
| 33,975 |
|
| — |
|
| 115,335 |
|
| — |
|
| 149,310 |
|
| (95,431) |
|
| 53,879 |
| |
| 35,973 | |
| 1,384 | |
| — | |
| 49,724 | | | — | |
| 87,081 | |
| (57,197) | |
| 29,884 | |||
Servicing fees |
|
| 560 |
|
| — |
|
| 111,145 |
|
| — |
|
| 111,705 |
|
| (40,784) |
|
| 70,921 |
| |
| 314 | |
| — | |
| — | |
| 15,033 | | | — | |
| 15,347 | |
| (3,896) | |
| 11,451 | |||
Rental income |
|
| — |
|
| 85,048 |
|
| 25,214 |
|
| — |
|
| 110,262 |
|
| — |
|
| 110,262 |
| | | 768 | | | — | | | 127,527 | | | 18,561 | | | — | | | 146,856 | | | — | | | 146,856 | |||
Other revenues |
|
| 180 |
|
| 35 |
|
| 4,110 |
|
| — |
|
| 4,325 |
|
| (511) |
|
| 3,814 |
| |
| 232 | |
| 243 | |
| 180 | |
| 793 | | | — | |
| 1,448 | |
| (3) | |
| 1,445 | |||
Total revenues |
|
| 383,175 |
|
| 85,083 |
|
| 268,658 |
|
| — |
|
| 736,916 |
|
| (136,726) |
|
| 600,190 |
| |
| 379,804 | |
| 43,166 | |
| 127,707 | |
| 88,585 | |
| — | |
| 639,262 | |
| (61,096) | |
| 578,166 | |||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |||
Management fees |
|
| 1,295 |
|
| — |
|
| 54 |
|
| 75,015 |
|
| 76,364 |
|
| 146 |
|
| 76,510 |
| |
| 690 | |
| — | |
| — | |
| 459 | |
| 62,661 | |
| 63,810 | |
| 33 | |
| 63,843 | |||
Interest expense |
|
| 67,585 |
|
| 16,163 |
|
| 11,443 |
|
| 78,236 |
|
| 173,427 |
|
| (190) |
|
| 173,237 |
| |
| 95,821 | |
| 22,795 | |
| 33,063 | |
| 13,371 | | | 56,630 | |
| 221,680 | |
| (162) | |
| 221,518 | |||
General and administrative |
|
| 13,529 |
|
| 2,259 |
|
| 95,726 |
|
| 7,631 |
|
| 119,145 |
|
| 532 |
|
| 119,677 |
| |
| 16,747 | |
| 8,760 | |
| 2,359 | |
| 35,677 | | | 7,669 | |
| 71,212 | |
| 167 | |
| 71,379 | |||
Acquisition and investment pursuit costs |
|
| 1,602 |
|
| 1,517 |
|
| 1,551 |
|
| 1,012 |
|
| 5,682 |
|
| — |
|
| 5,682 |
| |
| 1,438 | |
| 1,117 | |
| 12 | |
| (68) | | | — | |
| 2,499 | |
| — | |
| 2,499 | |||
Costs of rental operations |
|
| — |
|
| 34,923 |
|
| 11,595 |
|
| — |
|
| 46,518 |
|
| — |
|
| 46,518 |
| | | 1,766 | | | — | | | 47,555 | | | 8,525 | | | — | | | 57,846 | | | — | | | 57,846 | |||
Depreciation and amortization |
|
| — |
|
| 41,922 |
|
| 11,263 |
|
| — |
|
| 53,185 |
|
| — |
|
| 53,185 |
| |
| 845 | |
| 159 | |
| 38,441 | |
| 7,956 | | | — | |
| 47,401 | |
| — | |
| 47,401 | |||
Loan loss allowance, net |
|
| 3,395 |
|
| — |
|
| — |
|
| — |
|
| 3,395 |
|
| — |
|
| 3,395 |
| |||||||||||||||||||||||||||
Credit loss provision, net | |
| 51,511 | |
| 7,360 | |
| — | |
| — | | | — | |
| 58,871 | |
| — | |
| 58,871 | |||||||||||||||||||||||||
Other expense |
|
| — |
|
| 513 |
|
| 298 |
|
| — |
|
| 811 |
|
| — |
|
| 811 |
| |
| 153 | |
| — | |
| 337 | |
| — | | | — | |
| 490 | |
| — | |
| 490 | |||
Total costs and expenses |
|
| 87,406 |
|
| 97,297 |
|
| 131,930 |
|
| 161,894 |
|
| 478,527 |
|
| 488 |
|
| 479,015 |
| |
| 168,971 | |
| 40,191 | |
| 121,767 | |
| 65,920 | | | 126,960 | |
| 523,809 | |
| 38 | |
| 523,847 | |||
Income (loss) before other income (loss), income taxes and non-controlling interests |
|
| 295,769 |
|
| (12,214) |
|
| 136,728 |
|
| (161,894) |
|
| 258,389 |
|
| (137,214) |
|
| 121,175 |
| |||||||||||||||||||||||||||
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |||
Change in net assets related to consolidated VIEs |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 94,388 |
|
| 94,388 |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 5,768 | |
| 5,768 | |||
Change in fair value of servicing rights |
|
| — |
|
| — |
|
| (33,710) |
|
| — |
|
| (33,710) |
|
| 497 |
|
| (33,213) |
| |
| — | |
| — | |
| — | |
| 5,646 | | | — | |
| 5,646 | |
| (8,608) | |
| (2,962) | |||
Change in fair value of investment securities, net |
|
| (37) |
|
| — |
|
| (43,449) |
|
| — |
|
| (43,486) |
|
| 42,772 |
|
| (714) |
| |
| (22,425) | |
| — | |
| — | |
| (39,275) | | | — | |
| (61,700) | |
| 65,031 | |
| 3,331 | |||
Change in fair value of mortgage loans held-for-sale, net |
|
| — |
|
| — |
|
| 70,122 |
|
| — |
|
| 70,122 |
|
| — |
|
| 70,122 |
| |||||||||||||||||||||||||||
Earnings from unconsolidated entities |
|
| 2,544 |
|
| 7,313 |
|
| 3,280 |
|
| — |
|
| 13,137 |
|
| (288) |
|
| 12,849 |
| |||||||||||||||||||||||||||
Gain on sale of investments and other assets, net |
|
| 165 |
|
| — |
|
| — |
|
| — |
|
| 165 |
|
| — |
|
| 165 |
| |||||||||||||||||||||||||||
Change in fair value of mortgage loans, net | |
| (2,507) | |
| — | |
| — | |
| 20,823 | | | — | |
| 18,316 | |
| — | |
| 18,316 | |||||||||||||||||||||||||
Earnings (loss) from unconsolidated entities | |
| 722 | |
| (1,118) | |
| — | |
| 30,146 | | | — | |
| 29,750 | |
| (877) | |
| 28,873 | |||||||||||||||||||||||||
(Loss) gain on sale of investments and other assets, net | |
| (961) | |
| 296 | |
| — | |
| 7,433 | | | — | |
| 6,768 | |
| — | |
| 6,768 | |||||||||||||||||||||||||
Gain (loss) on derivative financial instruments, net |
|
| 17,824 |
|
| (6,837) |
|
| (17,780) |
|
| — |
|
| (6,793) |
|
| — |
|
| (6,793) |
| |
| 19,069 | |
| (1,438) | |
| (34,837) | |
| (22,934) | | | 33,752 | |
| (6,388) | |
| — | |
| (6,388) | |||
Foreign currency (loss) gain, net |
|
| (23,501) |
|
| (41) |
|
| 2,962 |
|
| — |
|
| (20,580) |
|
| — |
|
| (20,580) |
| |||||||||||||||||||||||||||
Foreign currency loss, net | |
| (27,059) | |
| (163) | |
| (67) | |
| (24) | | | — | |
| (27,313) | |
| — | |
| (27,313) | |||||||||||||||||||||||||
Loss on extinguishment of debt | | | (22) | | | (170) | | | (2,185) | | | — | | | — | | | (2,377) | | | — | | | (2,377) | |||||||||||||||||||||||||
Other income, net |
|
| — |
|
| 9,102 |
|
| 112 |
|
| 1,784 |
|
| 10,998 |
|
| — |
|
| 10,998 |
| |
| — | |
| — | |
| 241 | |
| 89 | | | — | |
| 330 | |
| — | |
| 330 | |||
Total other income (loss) |
|
| (3,005) |
|
| 9,537 |
|
| (18,463) |
|
| 1,784 |
|
| (10,147) |
|
| 137,369 |
|
| 127,222 |
| |||||||||||||||||||||||||||
Total other (loss) income | |
| (33,183) | |
| (2,593) | |
| (36,848) | |
| 1,904 | | | 33,752 | |
| (36,968) | |
| 61,314 | |
| 24,346 | |||||||||||||||||||||||||
Income (loss) before income taxes |
|
| 292,764 |
|
| (2,677) |
|
| 118,265 |
|
| (160,110) |
|
| 248,242 |
|
| 155 |
|
| 248,397 |
| |
| 177,650 | |
| 382 | |
| (30,908) | |
| 24,569 | | | (93,208) | |
| 78,485 | |
| 180 | |
| 78,665 | |||
Income tax provision |
|
| (75) |
|
| — |
|
| (3,392) |
|
| — |
|
| (3,467) |
|
| — |
|
| (3,467) |
| |||||||||||||||||||||||||||
Income tax benefit | |
| 1,165 | |
| 89 | |
| — | |
| 6,773 | | | — | |
| 8,027 | |
| — | |
| 8,027 | |||||||||||||||||||||||||
Net income (loss) |
|
| 292,689 |
|
| (2,677) |
|
| 114,873 |
|
| (160,110) |
|
| 244,775 |
|
| 155 |
|
| 244,930 |
| |
| 178,815 | |
| 471 | |
| (30,908) | |
| 31,342 | | | (93,208) | |
| 86,512 | |
| 180 | |
| 86,692 | |||
Net (income) loss attributable to non-controlling interests |
|
| (1,050) |
|
| — |
|
| 171 |
|
| — |
|
| (879) |
|
| (155) |
|
| (1,034) |
| |||||||||||||||||||||||||||
Net income attributable to non-controlling interests | |
| (7) | |
| — | |
| (10,222) | |
| (3,396) | | | — | |
| (13,625) | |
| (180) | |
| (13,805) | |||||||||||||||||||||||||
Net income (loss) attributable to Starwood Property Trust, Inc. |
| $ | 291,639 |
| $ | (2,677) |
| $ | 115,044 |
| $ | (160,110) |
| $ | 243,896 |
| $ | — |
| $ | 243,896 |
| | $ | 178,808 | | $ | 471 | | $ | (41,130) | | $ | 27,946 | | $ | (93,208) | | $ | 72,887 | | $ | — | | $ | 72,887 |
5960
The table below presents our results of operations for the six months ended June 30, 2019 by business segment (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Commercial and | | | | | | | | | | | | | | | ||||||||
|
| Residential |
| Infrastructure |
| |
| Investing |
| |
| |
| |
| | ||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | | Securitization | | | ||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Subtotal | | VIEs | | Total | ||||||||
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income from loans | | $ | 317,666 | | $ | 52,206 | | $ | — | | $ | 5,010 | | $ | — | | $ | 374,882 | | $ | — | | $ | 374,882 |
Interest income from investment securities | |
| 44,275 | | | 1,753 | |
| — | |
| 55,456 | | | — | |
| 101,484 | |
| (61,307) | |
| 40,177 |
Servicing fees | |
| 213 | | | — | |
| — | |
| 43,123 | | | — | |
| 43,336 | |
| (9,895) | |
| 33,441 |
Rental income | |
| — | | | — | | | 142,847 | | | 28,283 | | | — | |
| 171,130 | |
| — | |
| 171,130 |
Other revenues | |
| 456 | | | 693 | |
| 166 | |
| 711 | | | 26 | |
| 2,052 | |
| (21) | |
| 2,031 |
Total revenues | |
| 362,610 | | | 54,652 | |
| 143,013 | |
| 132,583 | |
| 26 | |
| 692,884 | |
| (71,223) | |
| 621,661 |
Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Management fees | |
| 764 | | | — | |
| — | |
| 36 | |
| 45,095 | |
| 45,895 | |
| 94 | |
| 45,989 |
Interest expense | |
| 120,168 | | | 34,835 | |
| 38,122 | |
| 16,261 | | | 55,736 | |
| 265,122 | |
| (324) | |
| 264,798 |
General and administrative | |
| 13,522 | | | 9,309 | |
| 3,224 | |
| 39,028 | | | 7,245 | |
| 72,328 | |
| 180 | |
| 72,508 |
Acquisition and investment pursuit costs | |
| 409 | | | 30 | |
| — | |
| (23) | | | — | |
| 416 | |
| — | |
| 416 |
Costs of rental operations | | | 760 | | | — | | | 46,062 | | | 13,484 | | | — | |
| 60,306 | |
| — | |
| 60,306 |
Depreciation and amortization | |
| 356 | | | — | |
| 46,972 | |
| 10,478 | | | — | |
| 57,806 | |
| — | |
| 57,806 |
Credit loss provision, net | |
| 2,085 | | | 1,196 | |
| — | |
| — | | | — | |
| 3,281 | |
| — | |
| 3,281 |
Other expense | |
| 153 | | | — | |
| 1,307 | | �� | 194 | | | — | |
| 1,654 | |
| — | |
| 1,654 |
Total costs and expenses | |
| 138,217 | | | 45,370 | |
| 135,687 | |
| 79,458 | | | 108,076 | |
| 506,808 | |
| (50) | |
| 506,758 |
Other income (loss): | | | | | | | | | | | | | | | | | | | | | | | | |
Change in net assets related to consolidated VIEs | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 102,994 | |
| 102,994 |
Change in fair value of servicing rights | |
| — | | | — | |
| — | |
| (1,674) | | | — | |
| (1,674) | |
| (9) | |
| (1,683) |
Change in fair value of investment securities, net | |
| (2,642) | | | — | |
| — | |
| 33,955 | | | — | |
| 31,313 | |
| (30,584) | |
| 729 |
Change in fair value of mortgage loans, net | |
| 6,749 | | | — | |
| — | |
| 26,408 | | | — | |
| 33,157 | |
| — | |
| 33,157 |
Earnings (loss) from unconsolidated entities | |
| 6,069 | | | — | |
| (42,761) | |
| 3,348 | | | — | |
| (33,344) | |
| (1,039) | |
| (34,383) |
Gain on sale of investments and other assets, net | |
| 2,994 | | | 3,066 | |
| — | |
| 940 | | | — | |
| 7,000 | |
| — | |
| 7,000 |
(Loss) gain on derivative financial instruments, net | |
| (3,705) | | | (3,228) | |
| (9,857) | |
| (10,385) | | | 24,936 | |
| (2,239) | |
| — | |
| (2,239) |
Foreign currency (loss) gain, net | |
| (1,688) | | | 217 | |
| 1 | |
| — | | | — | |
| (1,470) | |
| — | |
| (1,470) |
(Loss) gain on extinguishment of debt | | | — | | | (6,120) | | | — | | | — | | | 6 | | | (6,114) | | | — | | | (6,114) |
Other loss, net | |
| — | | | — | |
| — | |
| — | | | (73) | |
| (73) | |
| — | |
| (73) |
Total other income (loss) | |
| 7,777 | | | (6,065) | |
| (52,617) | |
| 52,592 | | | 24,869 | |
| 26,556 | |
| 71,362 | |
| 97,918 |
Income (loss) before income taxes | |
| 232,170 | | | 3,217 | |
| (45,291) | |
| 105,717 | | | (83,181) | |
| 212,632 | |
| 189 | |
| 212,821 |
Income tax (provision) benefit | |
| (1,584) | | | 271 | | | (258) | |
| (2,296) | | | — | |
| (3,867) | |
| — | |
| (3,867) |
Net income (loss) | |
| 230,586 | | | 3,488 | |
| (45,549) | |
| 103,421 | | | (83,181) | |
| 208,765 | |
| 189 | |
| 208,954 |
Net (income) loss attributable to non-controlling interests | |
| (392) | | | — | |
| (11,072) | |
| 98 | | | — | |
| (11,366) | |
| (189) | |
| (11,555) |
Net income (loss) attributable to Starwood Property Trust, Inc. | | $ | 230,194 | | $ | 3,488 | | $ | (56,621) | | $ | 103,519 | | $ | (83,181) | | $ | 197,399 | | $ | — | | $ | 197,399 |
61
The table below presents our condensed consolidated balance sheet as of SeptemberJune 30, 20172020 by business segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
| Investing |
|
| |||||||||||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
| and Servicing |
|
| |||||||||||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Subtotal |
| VIEs |
| Total | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
| | Commercial and | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | | | | | |||||||||||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | | Securitization | | | |||||||||||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Subtotal | | VIEs | | Total | |||||||||||||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents |
| $ | 43,513 |
| $ | 8,581 |
| $ | 58,584 |
| $ | 298,006 |
| $ | 408,684 |
| $ | 5,161 |
| $ | 413,845 | | $ | 13,959 | | $ | 299 | | $ | 30,237 | | $ | 35,855 | | $ | 266,333 | | $ | 346,683 | | $ | 1,051 | | $ | 347,734 |
Restricted cash |
|
| 22,527 |
|
| 20,189 |
|
| 11,875 |
|
| — |
|
| 54,591 |
|
| — |
|
| 54,591 | |
| 114,656 | |
| 34,160 | |
| 7,537 | |
| 20,044 | |
| — | |
| 176,397 | |
| — | |
| 176,397 |
Loans held-for-investment, net |
|
| 6,378,468 |
|
| — |
|
| 3,903 |
|
| — |
|
| 6,382,371 |
|
| — |
|
| 6,382,371 | |
| 8,960,410 | |
| 1,459,239 | |
| — | |
| 1,153 | |
| — | |
| 10,420,802 | |
| — | |
| 10,420,802 |
Loans held-for-sale |
|
| 418,618 |
|
| — |
|
| 190,006 |
|
| — |
|
| 608,624 |
|
| — |
|
| 608,624 | |
| 432,786 | |
| 44,876 | |
| — | |
| 194,097 | |
| — | |
| 671,759 | |
| — | |
| 671,759 |
Loans transferred as secured borrowings |
|
| 74,339 |
|
| — |
|
| — |
|
| — |
|
| 74,339 |
|
| — |
|
| 74,339 | ||||||||||||||||||||||||
Investment securities |
|
| 677,977 |
|
| — |
|
| 1,026,634 |
|
| — |
|
| 1,704,611 |
|
| (1,002,793) |
|
| 701,818 | |
| 1,120,624 | |
| 40,312 | |
| — | |
| 1,094,613 | |
| — | |
| 2,255,549 | |
| (1,503,524) | |
| 752,025 |
Properties, net |
|
| — |
|
| 2,234,646 |
|
| 286,696 |
|
| — |
|
| 2,521,342 |
|
| — |
|
| 2,521,342 | | | 27,283 | | | — | | | 1,998,759 | | | 198,281 | | | — | | | 2,224,323 | | | — | | | 2,224,323 |
Intangible assets |
|
| — |
|
| 116,856 |
|
| 91,591 |
|
| — |
|
| 208,447 |
|
| (26,582) |
|
| 181,865 | |
| — | |
| — | |
| 43,580 | |
| 67,567 | |
| — | |
| 111,147 | |
| (34,854) | |
| 76,293 |
Investment in unconsolidated entities |
|
| 36,831 |
|
| 109,607 |
|
| 117,772 |
|
| — |
|
| 264,210 |
|
| (20,760) |
|
| 243,450 | |
| 49,853 | |
| 24,744 | |
| — | |
| 47,114 | |
| — | |
| 121,711 | |
| (16,798) | |
| 104,913 |
Goodwill |
|
| — |
|
| — |
|
| 140,437 |
|
| — |
|
| 140,437 |
|
| — |
|
| 140,437 | |
| — | |
| 119,409 | |
| — | |
| 140,437 | |
| — | |
| 259,846 | |
| — | |
| 259,846 |
Derivative assets |
|
| 13,513 |
|
| 22,480 |
|
| 2,300 |
|
| — |
|
| 38,293 |
|
| — |
|
| 38,293 | |
| 47,875 | |
| — | |
| 348 | |
| 586 | |
| 42,096 | |
| 90,905 | |
| — | |
| 90,905 |
Accrued interest receivable |
|
| 34,569 |
|
| — |
|
| 478 |
|
| — |
|
| 35,047 |
|
| — |
|
| 35,047 | |
| 55,877 | |
| 3,163 | |
| — | |
| 520 | |
| 13,589 | |
| 73,149 | |
| (1,401) | |
| 71,748 |
Other assets |
|
| 10,286 |
|
| 40,705 |
|
| 61,787 |
|
| 2,293 |
|
| 115,071 |
|
| (2,806) |
|
| 112,265 | |
| 29,864 | |
| 5,616 | |
| 81,859 | |
| 57,321 | |
| 9,512 | |
| 184,172 | |
| (25) | |
| 184,147 |
VIE assets, at fair value |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 51,197,981 |
|
| 51,197,981 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 64,175,387 | |
| 64,175,387 |
Total Assets |
| $ | 7,710,641 |
| $ | 2,553,064 |
| $ | 1,992,063 |
| $ | 300,299 |
| $ | 12,556,067 |
| $ | 50,150,201 |
| $ | 62,706,268 | | $ | 10,853,187 | | $ | 1,731,818 | | $ | 2,162,320 | | $ | 1,857,588 | | $ | 331,530 | | $ | 16,936,443 | | $ | 62,619,836 | | $ | 79,556,279 |
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable, accrued expenses and other liabilities |
| $ | 27,821 |
| $ | 71,726 |
| $ | 78,398 |
| $ | 24,739 |
| $ | 202,684 |
| $ | 1,098 |
| $ | 203,782 | | $ | 27,941 | | $ | 10,285 | | $ | 45,277 | | $ | 36,400 | | $ | 91,765 | | $ | 211,668 | | $ | 54 | | $ | 211,722 |
Related-party payable |
|
| — |
|
| — |
|
| 43 |
|
| 29,946 |
|
| 29,989 |
|
| — |
|
| 29,989 | |
| — | |
| — | |
| — | |
| 5 | |
| 20,936 | |
| 20,941 | |
| — | |
| 20,941 |
Dividends payable |
|
| — |
|
| — |
|
| — |
|
| 125,674 |
|
| 125,674 |
|
| — |
|
| 125,674 | |
| — | |
| — | |
| — | |
| — | |
| 138,778 | |
| 138,778 | |
| — | |
| 138,778 |
Derivative liabilities |
|
| 14,105 |
|
| 8,784 |
|
| 1 |
|
| — |
|
| 22,890 |
|
| — |
|
| 22,890 | |
| 2,260 | |
| 1,620 | |
| — | |
| — | |
| — | |
| 3,880 | |
| — | |
| 3,880 |
Secured financing agreements, net |
|
| 3,223,863 |
|
| 1,501,006 |
|
| 516,933 |
|
| 296,593 |
|
| 5,538,395 |
|
| (23,700) |
|
| 5,514,695 | |
| 4,749,321 | |
| 1,221,001 | |
| 1,792,818 | |
| 683,466 | |
| 389,714 | |
| 8,836,320 | |
| — | |
| 8,836,320 |
Collateralized loan obligations, net | | | 929,307 | | | — | | | — | |
| — | |
| — | |
| 929,307 | | | — | | | 929,307 | |||||||||||||||||||||
Unsecured senior notes, net |
|
| — |
|
| — |
|
| — |
|
| 2,044,523 |
|
| 2,044,523 |
|
| — |
|
| 2,044,523 | |
| — | |
| — | |
| — | |
| — | |
| 1,932,560 | |
| 1,932,560 | |
| — | |
| 1,932,560 |
Secured borrowings on transferred loans, net |
|
| 74,200 |
|
| — |
|
| — |
|
| — |
|
| 74,200 |
|
| — |
|
| 74,200 | ||||||||||||||||||||||||
VIE liabilities, at fair value |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 50,150,781 |
|
| 50,150,781 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| 62,617,975 | |
| 62,617,975 |
Total Liabilities |
|
| 3,339,989 |
|
| 1,581,516 |
|
| 595,375 |
|
| 2,521,475 |
|
| 8,038,355 |
|
| 50,128,179 |
|
| 58,166,534 | |
| 5,708,829 | |
| 1,232,906 | |
| 1,838,095 | |
| 719,871 | |
| 2,573,753 | |
| 12,073,454 | |
| 62,618,029 | |
| 74,691,483 |
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Starwood Property Trust, Inc. Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Common stock |
|
| — |
|
| — |
|
| — |
|
| 2,654 |
|
| 2,654 |
|
| — |
|
| 2,654 | |
| — | |
| — | |
| — | |
| — | |
| 2,916 | |
| 2,916 | |
| — | |
| 2,916 |
Additional paid-in capital |
|
| 1,808,624 |
|
| 981,129 |
|
| 747,298 |
|
| 1,167,993 |
|
| 4,705,044 |
|
| — |
|
| 4,705,044 | |
| 1,473,921 | |
| 504,262 | |
| 137,777 | |
| (228,654) | |
| 3,306,266 | |
| 5,193,572 | |
| — | |
| 5,193,572 |
Treasury stock |
|
| — |
|
| — |
|
| — |
|
| (92,104) |
|
| (92,104) |
|
| — |
|
| (92,104) | |
| — | |
| — | |
| — | |
| — | |
| (133,024) | |
| (133,024) | |
| — | |
| (133,024) |
Accumulated other comprehensive income (loss) |
|
| 55,687 |
|
| 9,668 |
|
| (84) |
|
| — |
|
| 65,271 |
|
| — |
|
| 65,271 | |
| 42,930 | |
| — | |
| — | |
| (64) | |
| — | |
| 42,866 | |
| — | |
| 42,866 |
Retained earnings (accumulated deficit) |
|
| 2,495,536 |
|
| (19,249) |
|
| 639,359 |
|
| (3,299,719) |
|
| (184,073) |
|
| — |
|
| (184,073) | |
| 3,627,392 | |
| (5,350) | |
| (40,699) | |
| 1,222,945 | |
| (5,418,381) | |
| (614,093) | |
| — | |
| (614,093) |
Total Starwood Property Trust, Inc. Stockholders’ Equity |
|
| 4,359,847 |
|
| 971,548 |
|
| 1,386,573 |
|
| (2,221,176) |
|
| 4,496,792 |
|
| — |
|
| 4,496,792 | |
| 5,144,243 | |
| 498,912 | |
| 97,078 | |
| 994,227 | |
| (2,242,223) | |
| 4,492,237 | |
| — | |
| 4,492,237 |
Non-controlling interests in consolidated subsidiaries |
|
| 10,805 |
|
| — |
|
| 10,115 |
|
| — |
|
| 20,920 |
|
| 22,022 |
|
| 42,942 | |
| 115 | |
| — | |
| 227,147 | |
| 143,490 | |
| — | |
| 370,752 | |
| 1,807 | |
| 372,559 |
Total Equity |
|
| 4,370,652 |
|
| 971,548 |
|
| 1,396,688 |
|
| (2,221,176) |
|
| 4,517,712 |
|
| 22,022 |
|
| 4,539,734 | |
| 5,144,358 | |
| 498,912 | |
| 324,225 | |
| 1,137,717 | |
| (2,242,223) | |
| 4,862,989 | |
| 1,807 | |
| 4,864,796 |
Total Liabilities and Equity |
| $ | 7,710,641 |
| $ | 2,553,064 |
| $ | 1,992,063 |
| $ | 300,299 |
| $ | 12,556,067 |
| $ | 50,150,201 |
| $ | 62,706,268 | | $ | 10,853,187 | | $ | 1,731,818 | | $ | 2,162,320 | | $ | 1,857,588 | | $ | 331,530 | | $ | 16,936,443 | | $ | 62,619,836 | | $ | 79,556,279 |
6062
The table below presents our condensed consolidated balance sheet as of December 31, 20162019 by business segment (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
|
|
| Investing |
|
|
| ||||||||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
|
| and Servicing |
|
|
| |||||||||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Subtotal |
| VIEs |
| Total | |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||
| | Commercial and | | | | | | | | | | | | | | | |||||||||||||||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | | | | | |||||||||||||||||||||||||||||
|
| Lending | | Lending | | Property | | and Servicing | | | | | | Securitization | | | |||||||||||||||||||||||||||||
|
| Segment | | Segment | | Segment | | Segment | | Corporate | | Subtotal | | VIEs | | Total | |||||||||||||||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | |
| | | | | | | | |
| | |
| | |
| | |
| | |
Cash and cash equivalents |
| $ | 7,085 |
| $ | 7,701 |
| $ | 38,798 |
| $ | 560,790 |
| $ | 614,374 |
| $ | 1,148 |
| $ | 615,522 |
| $ | 26,278 |
| $ | 2,209 | | $ | 30,123 |
| $ | 61,693 |
| $ | 356,864 |
| $ | 477,167 |
| $ | 1,221 |
| $ | 478,388 |
Restricted cash |
|
| 17,885 |
|
| 9,146 |
|
| 8,202 |
|
| — |
|
| 35,233 |
|
| — |
|
| 35,233 | |
| 36,135 | | | 41,967 | |
| 7,171 | |
| 10,370 | |
| — | |
| 95,643 | |
| — | |
| 95,643 |
Loans held-for-investment, net |
|
| 5,827,553 |
|
| — |
|
| 20,442 |
|
| — |
|
| 5,847,995 |
|
| — |
|
| 5,847,995 | |
| 9,187,332 | | | 1,397,448 | |
| — | |
| 1,294 | |
| — | |
| 10,586,074 | |
| — | |
| 10,586,074 |
Loans held-for-sale |
|
| — |
|
| — |
|
| 63,279 |
|
| — |
|
| 63,279 |
|
| — |
|
| 63,279 | |
| 605,384 | | | 119,528 | |
| — | |
| 159,238 | |
| — | |
| 884,150 | |
| — | |
| 884,150 |
Loans transferred as secured borrowings |
|
| 35,000 |
|
| — |
|
| — |
|
| — |
|
| 35,000 |
|
| — |
|
| 35,000 | ||||||||||||||||||||||||
Investment securities |
|
| 776,072 |
|
| — |
|
| 990,570 |
|
| — |
|
| 1,766,642 |
|
| (959,024) |
|
| 807,618 | |
| 992,974 | | | 45,153 | |
| — | |
| 1,177,148 | |
| — | |
| 2,215,275 | |
| (1,405,037) | |
| 810,238 |
Properties, net |
|
| — |
|
| 1,667,108 |
|
| 277,612 |
|
| — |
|
| 1,944,720 |
|
| — |
|
| 1,944,720 | | | 26,834 | | | — | | | 2,029,024 | | | 210,582 | | | — | |
| 2,266,440 | |
| — | |
| 2,266,440 |
Intangible assets |
|
| — |
|
| 128,159 |
|
| 125,327 |
|
| — |
|
| 253,486 |
|
| (34,238) |
|
| 219,248 | |
| — | | | — | |
| 47,303 | |
| 64,644 | |
| — | |
| 111,947 | |
| (26,247) | |
| 85,700 |
Investment in unconsolidated entities |
|
| 30,874 |
|
| 124,977 |
|
| 56,376 |
|
| — |
|
| 212,227 |
|
| (7,622) |
|
| 204,605 | |
| 46,921 | | | 25,862 | |
| — | |
| 32,183 | |
| — | |
| 104,966 | |
| (20,637) | |
| 84,329 |
Goodwill |
|
| — |
|
| — |
|
| 140,437 |
|
| — |
|
| 140,437 |
|
| — |
|
| 140,437 | |
| — | | | 119,409 | |
| — | |
| 140,437 | |
| — | |
| 259,846 | |
| — | |
| 259,846 |
Derivative assets |
|
| 45,282 |
|
| 42,893 |
|
| 1,186 |
|
| — |
|
| 89,361 |
|
| — |
|
| 89,361 | |
| 14,718 | | | 7 | |
| 3 | |
| 7 | |
| 14,208 | |
| 28,943 | |
| — | |
| 28,943 |
Accrued interest receivable |
|
| 25,831 |
|
| — |
|
| 2,393 |
|
| — |
|
| 28,224 |
|
| — |
|
| 28,224 | |
| 45,996 | | | 3,134 | |
| 133 | |
| 2,388 | |
| 13,242 | |
| 64,893 | |
| (806) | |
| 64,087 |
Other assets |
|
| 13,470 |
|
| 29,569 |
|
| 59,503 |
|
| 1,866 |
|
| 104,408 |
|
| (2,645) |
|
| 101,763 | |
| 59,170 | | | 6,101 | |
| 82,910 | |
| 54,238 | |
| 8,911 | |
| 211,330 | |
| (7) | |
| 211,323 |
VIE assets, at fair value |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 67,123,261 |
|
| 67,123,261 | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 62,187,175 | |
| 62,187,175 |
Total Assets |
| $ | 6,779,052 |
| $ | 2,009,553 |
| $ | 1,784,125 |
| $ | 562,656 |
| $ | 11,135,386 |
| $ | 66,120,880 |
| $ | 77,256,266 | | $ | 11,041,742 | | $ | 1,760,818 | | $ | 2,196,667 | | $ | 1,914,222 | | $ | 393,225 | | $ | 17,306,674 | | $ | 60,735,662 | | $ | 78,042,336 |
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable, accrued expenses and other liabilities |
| $ | 20,769 |
| $ | 81,873 |
| $ | 68,603 |
| $ | 26,003 |
| $ | 197,248 |
| $ | 886 |
| $ | 198,134 | | $ | 30,594 | | $ | 6,443 | | $ | 48,370 | | $ | 73,021 | | $ | 53,494 | | $ | 211,922 | | $ | 84 | | $ | 212,006 |
Related-party payable |
|
| — |
|
| — |
|
| 440 |
|
| 37,378 |
|
| 37,818 |
|
| — |
|
| 37,818 | |
| — | | | — | |
| — | |
| 5 | |
| 40,920 | |
| 40,925 | |
| — | |
| 40,925 |
Dividends payable |
|
| — |
|
| — |
|
| — |
|
| 125,075 |
|
| 125,075 |
|
| — |
|
| 125,075 | |
| — | | | — | |
| — | |
| — | |
| 137,427 | |
| 137,427 | |
| — | |
| 137,427 |
Derivative liabilities |
|
| 3,388 |
|
| — |
|
| 516 |
|
| — |
|
| 3,904 |
|
| — |
|
| 3,904 | |
| 7,698 | | | 750 | |
| — | |
| 292 | |
| — | |
| 8,740 | |
| — | |
| 8,740 |
Secured financing agreements, net |
|
| 2,258,462 |
|
| 1,196,830 |
|
| 426,683 |
|
| 295,851 |
|
| 4,177,826 |
|
| (23,700) |
|
| 4,154,126 | |
| 5,038,876 | | | 1,217,066 | |
| 1,698,334 | |
| 574,507 | |
| 391,215 | |
| 8,919,998 | |
| (13,950) | |
| 8,906,048 |
Collateralized loan obligations, net | | | 928,060 | | | — | |
| — | |
| — | |
| — | |
| 928,060 | |
| — | |
| 928,060 | |||||||||||||||||||||
Unsecured senior notes, net |
|
| — |
|
| — |
|
| — |
|
| 2,011,544 |
|
| 2,011,544 |
|
| — |
|
| 2,011,544 | |
| — | | | — | |
| — | |
| — | |
| 1,928,622 | |
| 1,928,622 | |
| — | |
| 1,928,622 |
Secured borrowings on transferred loans |
|
| 35,000 |
|
| — |
|
| — |
|
| — |
|
| 35,000 |
|
| — |
|
| 35,000 | ||||||||||||||||||||||||
VIE liabilities, at fair value |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 66,130,592 |
|
| 66,130,592 | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 60,743,494 | |
| 60,743,494 |
Total Liabilities |
|
| 2,317,619 |
|
| 1,278,703 |
|
| 496,242 |
|
| 2,495,851 |
|
| 6,588,415 |
|
| 66,107,778 |
|
| 72,696,193 | |
| 6,005,228 | | | 1,224,259 | |
| 1,746,704 | |
| 647,825 | |
| 2,551,678 | |
| 12,175,694 | |
| 60,729,628 | |
| 72,905,322 |
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Starwood Property Trust, Inc. Stockholders’ Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Common stock |
|
| — |
|
| — |
|
| — |
|
| 2,639 |
|
| 2,639 |
|
| — |
|
| 2,639 | |
| — | | | — | |
| — | |
| — | |
| 2,874 | |
| 2,874 | |
| — | |
| 2,874 |
Additional paid-in capital |
|
| 2,218,671 |
|
| 696,049 |
|
| 883,761 |
|
| 892,699 |
|
| 4,691,180 |
|
| — |
|
| 4,691,180 | |
| 1,522,360 | | | 529,668 | |
| 208,650 | |
| (123,210) | |
| 2,995,064 | |
| 5,132,532 | |
| — | |
| 5,132,532 |
Treasury stock |
|
| — |
|
| — |
|
| — |
|
| (92,104) |
|
| (92,104) |
|
| — |
|
| (92,104) | |
| — | | | — | |
| — | |
| — | |
| (104,194) | |
| (104,194) | |
| — | |
| (104,194) |
Accumulated other comprehensive income (loss) |
|
| 44,903 |
|
| (8,328) |
|
| (437) |
|
| — |
|
| 36,138 |
|
| — |
|
| 36,138 | |
| 50,996 | | | — | |
| — | |
| (64) | |
| — | |
| 50,932 | |
| — | |
| 50,932 |
Retained earnings (accumulated deficit) |
|
| 2,186,727 |
|
| 43,129 |
|
| 390,994 |
|
| (2,736,429) |
|
| (115,579) |
|
| — |
|
| (115,579) | |
| 3,463,158 | | | 6,891 | |
| 5,431 | |
| 1,194,998 | |
| (5,052,197) | |
| (381,719) | |
| — | |
| (381,719) |
Total Starwood Property Trust, Inc. Stockholders’ Equity |
|
| 4,450,301 |
|
| 730,850 |
|
| 1,274,318 |
|
| (1,933,195) |
|
| 4,522,274 |
|
| — |
|
| 4,522,274 | |
| 5,036,514 | | | 536,559 | |
| 214,081 | |
| 1,071,724 | |
| (2,158,453) | |
| 4,700,425 | |
| — | |
| 4,700,425 |
Non-controlling interests in consolidated subsidiaries |
|
| 11,132 |
|
| — |
|
| 13,565 |
|
| — |
|
| 24,697 |
|
| 13,102 |
|
| 37,799 | |
| — | | | — | |
| 235,882 | |
| 194,673 | |
| — | |
| 430,555 | |
| 6,034 | |
| 436,589 |
Total Equity |
|
| 4,461,433 |
|
| 730,850 |
|
| 1,287,883 |
|
| (1,933,195) |
|
| 4,546,971 |
|
| 13,102 |
|
| 4,560,073 | |
| 5,036,514 | | | 536,559 | |
| 449,963 | |
| 1,266,397 | |
| (2,158,453) | |
| 5,130,980 | |
| 6,034 | |
| 5,137,014 |
Total Liabilities and Equity |
| $ | 6,779,052 |
| $ | 2,009,553 |
| $ | 1,784,125 |
| $ | 562,656 |
| $ | 11,135,386 |
| $ | 66,120,880 |
| $ | 77,256,266 | | $ | 11,041,742 | | $ | 1,760,818 | | $ | 2,196,667 | | $ | 1,914,222 | | $ | 393,225 | | $ | 17,306,674 | | $ | 60,735,662 | | $ | 78,042,336 |
6163
Our significant events subsequent to SeptemberJune 30, 20172020 were as follows:
Convertible Senior Notes Due 2017Commercial Mortgage Loan Securitization
In October 2017,July 2020, we repaidsecuritized commercial mortgage loans held-for-sale with a principal balance of $151.3 million.
Secured Financing Agreements
In July 2020, we amended the full principal amountInfrastructure Loans repurchase facility with a maximum facility size of $500.0 million to extend the 2017 Notes in cash upon their maturity.current maturity from February 2021 to February 2022.
Dividend Declaration
On November 8, 2017, our board of directors declared a dividend of $0.48 per share for the fourth quarter of 2017, which is payable on January 15, 2018 to common stockholders of record as of December 29, 2017.
6264
Item 2. Management’s Discussion and AnalysisAnalysis of Financial Condition and Results of Operations
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the information included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the2019 (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 a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering. We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate investments in both the United States (“U.S.”) and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.
We have threefour reportable business segments as of SeptemberJune 30, 2017:2020 and we refer to the investments within these segments as our target assets:
| Real estate commercial and residential lending (the |
| 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 |
| Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing business in the U.S. that manages and works out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts. |
Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).
Refer to Note 1 of our condensed consolidated financial statements included herein (the “Condensed Consolidated Financial Statements”) for further discussion of our business and organization.
6365
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 professionals who oversee our commercial loans and are in regular communication with these borrowers. We have utilized these relationships to address the potential impacts of the COVID-19 pandemic 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 ended June 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 ended June 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
In our infrastructure segment, we collected 100% of interest due in the three months ended June 30, 2020. Our borrowers did not request, nor did we grant, any payment related loan modifications during the three months ended June 30, 2020.
Developments During the ThirdSecond Quarter of 20172020
Master Lease Portfolio AcquisitionCommercial and Residential Lending Segment
On September 25, 2017, we acquired 20 retail properties and three industrial properties (the “Master Lease Portfolio”) for a purchase price of $553.3 million, inclusive of $3.7 million of related transaction costs. Concurrently with the acquisition, we leased the properties back to the seller under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations. These properties, which collectively comprise 5.3 million square feet, are geographically dispersed throughout the U.S., with more than 50% of the portfolio, by carrying value, located in Utah, Florida, Texas and Minnesota. We utilized $265.9 million in new financing in order to fund the acquisition.
Other Developments
| Received gross proceeds of $224.5 million and $172.1 million ($37.7 million and $172.1 million, net of debt repayments) from sales of senior interests in first mortgage loans and whole loan interests, respectively. |
| Originated or acquired $197.7 million of commercial loans during the |
o | $ |
o | $58.2 million of a Euro (“EUR”) and |
|
|
|
|
|
|
|
|
| Funded |
| Received gross proceeds of |
| Acquired $134.7 million of residential mortgage loans. |
| Received proceeds of |
Infrastructure Lending Segment
| Received proceeds of $35.8 million from maturities and principal repayments on our infrastructure loans and bonds. |
● | Funded $50.5 million of pre-existing infrastructure loan commitments. |
Property Segment
● | Refinanced our Woodstar I Portfolio by entering into mortgage loans with total borrowings of $217.1 million. The loans carry ten-year terms and weighted 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 |
|
|
|
|
| Sold commercial real estate for |
6467
Developments During the Nine Months Ended September 30, 2017First Quarter of 2020
Commercial and Residential Lending Segment
|
|
|
|
o | $ |
o | $197.2 million first mortgage loan to refinance the existing leasehold debt and provide acquisition financing for the |
o | $ |
|
|
|
|
|
|
|
|
|
|
|
|
| Funded |
| Received gross proceeds of |
| Acquired $386.1 million of residential mortgage loans. |
● | Received proceeds of $398.7 million, including retained RMBS of $29.3 million, from the securitization of $381.3 million of residential mortgage loans. |
Infrastructure Lending Segment
● | Received proceeds of $38.4 million from sales of infrastructure loans and $39.7 million from maturities and principal repayments on our infrastructure loans and bonds. |
● | Acquired $15.2 million of infrastructure loans and funded $48.5 million of pre-existing infrastructure loan commitments. |
Investing and Servicing Segment
● | Originated |
|
|
|
|
● | Acquired CMBS |
|
|
|
|
|
|
65
|
|
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 SeptemberJune 30, 2017.2020.
68
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 Non-GAAPsection captioned “Non-GAAP Financial Measures section herein.Measures”.
66
The following table compares our summarized results of operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
|
|
|
| For the Nine Months Ended |
|
|
| ||||||||
|
| September 30, |
|
|
|
| September 30, |
|
|
| ||||||||
|
| 2017 |
| 2016 |
| $ Change |
| 2017 |
| 2016 |
| $ Change | ||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending Segment |
| $ | 146,012 |
| $ | 128,101 |
| $ | 17,911 |
| $ | 397,179 |
| $ | 383,175 |
| $ | 14,004 |
Property Segment |
|
| 47,827 |
|
| 29,237 |
|
| 18,590 |
|
| 139,225 |
|
| 85,083 |
|
| 54,142 |
Investing and Servicing Segment |
|
| 72,214 |
|
| 91,879 |
|
| (19,665) |
|
| 241,327 |
|
| 268,658 |
|
| (27,331) |
Investing and Servicing VIEs |
|
| (39,286) |
|
| (44,512) |
|
| 5,226 |
|
| (140,675) |
|
| (136,726) |
|
| (3,949) |
|
|
| 226,767 |
|
| 204,705 |
|
| 22,062 |
|
| 637,056 |
|
| 600,190 |
|
| 36,866 |
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending Segment |
|
| 34,438 |
|
| 30,719 |
|
| 3,719 |
|
| 87,308 |
|
| 87,406 |
|
| (98) |
Property Segment |
|
| 49,304 |
|
| 31,684 |
|
| 17,620 |
|
| 140,647 |
|
| 97,297 |
|
| 43,350 |
Investing and Servicing Segment |
|
| 40,215 |
|
| 58,580 |
|
| (18,365) |
|
| 116,315 |
|
| 131,930 |
|
| (15,615) |
Corporate |
|
| 64,330 |
|
| 55,027 |
|
| 9,303 |
|
| 180,714 |
|
| 161,894 |
|
| 18,820 |
Investing and Servicing VIEs |
|
| (85) |
|
| 32 |
|
| (117) |
|
| (368) |
|
| 488 |
|
| (856) |
|
|
| 188,202 |
|
| 176,042 |
|
| 12,160 |
|
| 524,616 |
|
| 479,015 |
|
| 45,601 |
Other income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending Segment |
|
| 571 |
|
| 2,212 |
|
| (1,641) |
|
| 258 |
|
| (3,005) |
|
| 3,263 |
Property Segment |
|
| (45,008) |
|
| (2,272) |
|
| (42,736) |
|
| (60,957) |
|
| 9,537 |
|
| (70,494) |
Investing and Servicing Segment |
|
| 68,191 |
|
| 35,304 |
|
| 32,887 |
|
| 143,956 |
|
| (18,463) |
|
| 162,419 |
Corporate |
|
| — |
|
| 234 |
|
| (234) |
|
| (5,916) |
|
| 1,784 |
|
| (7,700) |
Investing and Servicing VIEs |
|
| 40,296 |
|
| 44,339 |
|
| (4,043) |
|
| 147,390 |
|
| 137,369 |
|
| 10,021 |
|
|
| 64,050 |
|
| 79,817 |
|
| (15,767) |
|
| 224,731 |
|
| 127,222 |
|
| 97,509 |
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lending Segment |
|
| 112,145 |
|
| 99,594 |
|
| 12,551 |
|
| 310,129 |
|
| 292,764 |
|
| 17,365 |
Property Segment |
|
| (46,485) |
|
| (4,719) |
|
| (41,766) |
|
| (62,379) |
|
| (2,677) |
|
| (59,702) |
Investing and Servicing Segment |
|
| 100,190 |
|
| 68,603 |
|
| 31,587 |
|
| 268,968 |
|
| 118,265 |
|
| 150,703 |
Corporate |
|
| (64,330) |
|
| (54,793) |
|
| (9,537) |
|
| (186,630) |
|
| (160,110) |
|
| (26,520) |
Investing and Servicing VIEs |
|
| 1,095 |
|
| (205) |
|
| 1,300 |
|
| 7,083 |
|
| 155 |
|
| 6,928 |
|
|
| 102,615 |
|
| 108,480 |
|
| (5,865) |
|
| 337,171 |
|
| 248,397 |
|
| 88,774 |
Income tax provision |
|
| (9,816) |
|
| (2,667) |
|
| (7,149) |
|
| (18,285) |
|
| (3,467) |
|
| (14,818) |
Net income attributable to non-controlling interests |
|
| (4,371) |
|
| (47) |
|
| (4,324) |
|
| (10,720) |
|
| (1,034) |
|
| (9,686) |
Net income attributable to Starwood Property Trust, Inc. |
| $ | 88,428 |
| $ | 105,766 |
| $ | (17,338) |
| $ | 308,166 |
| $ | 243,896 |
| $ | 64,270 |
69
Net income attributable to Starwood Property Trust, Inc. | | $ | 139,656 | | $ | 127,016 | | $ | 12,640 | | $ | 72,887 | | $ | 197,399 | | $ | (124,512) |
Three Months Ended SeptemberJune 30, 20172020 Compared to the Three Months Ended SeptemberJune 30, 20162019
Commercial and Residential Lending Segment
Revenues
For the three months ended SeptemberJune 30, 2017,2020, revenues of our Commercial and Residential Lending Segment increased $17.9decreased $19.4 million to $146.0$168.4 million, compared to $128.1$187.8 million for the three months ended SeptemberJune 30, 2016.2019. This increasedecrease was primarily due to (i) a $19.6 million increasedecreases in interest income from loans principally due to higher average loan balancesof $12.9 million and LIBOR rates, partially offset by (ii) a $1.8 millioninvestment 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 CMBSinvestment securities was primarily due to lower prepayment related income and RMBS investments.lower average LIBOR rates.
67
Costs and Expenses
For the three months ended SeptemberJune 30, 2017,2020, costs and expenses of our Commercial and Residential Lending Segment increased $3.7decreased $4.8 million to $34.4$64.2 million, compared to $30.7$69.0 million for the three months ended SeptemberJune 30, 2016.2019. This increasedecrease was primarily due to a $5.3$16.7 million increasedecrease in interest expense associated with the various secured financing facilities used to fund a portion of ourthis segment’s investment portfolio, partially offset by a $2.3$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 ended June 30, 2020 in accordance with the new credit loss accounting standard effective January 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 loan loss allowance. commercial loans.
Net Interest Income (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
|
|
| ||||
|
| September 30, |
|
|
| ||||
|
| 2017 |
| 2016 |
| Change | |||
Interest income from loans |
| $ | 134,149 |
| $ | 114,506 |
| $ | 19,643 |
Interest income from investment securities |
|
| 11,540 |
|
| 13,301 |
|
| (1,761) |
Interest expense |
|
| (27,929) |
|
| (22,678) |
|
| (5,251) |
Net interest income |
| $ | 117,760 |
| $ | 105,129 |
| $ | 12,631 |
| | | | | | | | | |
| | 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 SeptemberJune 30, 2017,2020, net interest income of our Commercial and Residential Lending Segment increased $12.6decreased $3.3 million to $117.8$125.6 million, compared to $105.1$128.9 million for the three months ended SeptemberJune 30, 2016.2019. This increasedecrease reflects the net increasedecrease in interest income explained in the Revenues discussion above, partially offset by the increasedecrease in interest expense on our secured financing facilities. facilities, both as discussed in the sections above.
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 % SeptemberJune 30, 20172020 and 2016,2019, the weighted average unlevered yieldyields on the Commercial and Residential Lending Segment’s loans and investment securities were as follows:
70
The overall weighted average unlevered yield was 7.4% for each period. The effectslower due to the lower levels of increasesprepayment related income and decreases in LIBOR were offset by a decline in interest rate spreads over the last twelve months.LIBOR.
During the three months ended SeptemberJune 30, 20172020 and 2016,2019, 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 3.9%2.7% and 3.4%4.5%, respectively, and 3.9% and 3.3%, respectively, excluding the impact of bridge financing.respectively. The increasesdecrease in borrowing rates primarily reflect increasesreflects decreases in LIBOR.
Other Income
For the three months ended SeptemberJune 30, 2017,2020, other income of our Commercial and Residential Lending Segment decreased $1.6increased $24.5 million to $0.6$33.3 million compared to $2.2$8.8 million for the three months ended SeptemberJune 30, 2016. The decrease2019. This increase was primarily due to (i) a $15.8$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 $14.5$3.2 million favorable change in foreign currency gain (loss). The unfavorable change from derivatives reflects a $14.9 million unfavorable change on foreign currency hedges and a $0.9 million unfavorable change on interest rate swaps. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments. The unfavorable change onin the foreign currency hedges and the favorable change in foreign currency gain (loss) reflect the overall weakening of the U.S. dollar against the pound sterlingAustralian Dollar (“GBP”AUD”) and EUR in the thirdsecond quarter of 2017 versus2020 compared to a strengthening of the U.S. dollar against the GBP in the thirdsecond quarter of 2016.2019. 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 |
6871
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 | | 2019 | |
Loans and investment securities held-for-investment | | 5.1 | % | 6.3 | % |
Loans held-for-sale | | 3.2 | % | 4.7 | % |
During the three months ended June 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 ended June 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 ended June 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 | ||||||||||
|
| Revenues |
| Cost and expenses |
| Other income (loss) |
| Income (loss) before income taxes | ||||
Master Lease Portfolio |
| $ | 722 |
| $ | 655 |
| $ | (1,665) |
| $ | (1,598) |
Medical Office Portfolio |
|
| 16,961 |
|
| 18,719 |
|
| (586) |
|
| (2,344) |
Ireland Portfolio |
|
| 411 |
|
| (125) |
|
| (4,298) |
|
| (3,762) |
Woodstar Portfolio |
|
| 496 |
|
| (1,821) |
|
| — |
|
| 2,317 |
Investment in unconsolidated entities |
|
| — |
|
| — |
|
| (36,187) |
|
| (36,187) |
Other/Corporate |
|
| — |
|
| 192 |
|
| — |
|
| (192) |
Total |
| $ | 18,590 |
| $ | 17,620 |
| $ | (42,736) |
| $ | (41,766) |
| | | | | | | | | | | | | | | |
|
| $ 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 36 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 ended June 30, 2020, revenues of our Property Segment decreased $8.8 million to $63.6 million, compared to $72.4 million for the three months ended June 30, 2019. The decrease in revenues was primarily due to the sale of the Ireland Portfolio in December 2019.
Costs and Expenses
For the three months ended SeptemberJune 30, 2017, revenues of our Property Segment increased $18.6 million to $47.8 million, compared to $29.2 million for the three months ended September 30, 2016. The increase in revenues in the third quarter of 2017 was primarily due to rental income from the Medical Office Portfolio, which was acquired in December 2016. The Master Lease Portfolio was acquired on September 25, 2017.
Costs and Expenses
For the three months ended September 30, 2017,2020, costs and expenses of our Property Segment increased $17.6decreased $7.1 million to $49.3$61.1 million, compared to $31.7$68.2 million for the three months ended SeptemberJune 30, 2016.2019. The increasedecrease in costs and expenses primarily reflects increases of $7.0 million in depreciation and amortization, $5.5 million in other rental related costs and $5.8 million in interest expense, all primarily due to the inclusionsale of the Medical OfficeIreland Portfolio acquired in December 2016, partially offset by lower amortization related to the Woodstar Portfolio’s in-place lease intangible asset, which is now fully amortized. 2019.
72
Other Loss
For the three months ended SeptemberJune 30, 2017,2020, other loss of our Property Segment increased $42.7decreased $3.4 million to $45.0$6.7 million, compared to $2.3$10.1 million for the three months ended SeptemberJune 30, 2016.2019. The increasedecrease in other loss was primarily due to (i) a $36.2 million unfavorable change in earnings (loss) from unconsolidated entities principally due to unfavorable decreases in fair value of the properties in the Retail Fund, which is an investment company that measures its assets at fair value (see Note 7 to the Condensed Consolidated Financial Statements) and (ii) a $6.5 million increaseddecreased loss on derivatives, primarily related$5.8 million of which was attributable to foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio and interest rate swaps which primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio.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 the Retail Fund was written off as of December 31, 2019 due to continued declines in the estimated fair values of its properties.
Investing and Servicing Segment and VIEs
Revenues
For the three months ended SeptemberJune 30, 2017,2020, revenues of our Investing and Servicing Segment decreased $14.5$21.5 million to $32.9 million after consolidated VIE eliminations of $39.3$44.1 million, compared to $47.4 million after consolidated VIE eliminations of $44.5$65.6 million for the three months ended SeptemberJune 30, 2016. The VIE eliminations are merely a function of the number of CMBS trusts consolidated in any given period, and as such, are not a meaningful indicator of the operating results for this segment.2019. The decrease in revenues in the thirdsecond quarter of 20172020 was primarily due to decreases of $8.0 million in servicing fees, $4.9 million in interest income from CMBS investments and $2.3
69
$7.5 million in interest income from conduit loans partially offset by a $2.0and CMBS, $7.3 million increasein servicing fees and $6.5 million in rental income onfrom our expanded REIS Equity Portfolio (see Note 36 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 $8.0decrease in interest income primarily reflects a $6.8 million decrease in servicing fees is primarily due to the divestiture of our European servicing and advisory business in October 2016 and lower domestic workout and liquidation fees. The $4.9 million decrease in CMBS interest income reflects a $1.4 million increase in VIE eliminations related to the CMBS trusts we consolidate. Excluding the effect of these eliminations, CMBS interest income decreased by $3.5 million, primarily reflecting a lower level of CMBS interest recoveries from asset liquidations by CMBS trusts.on CMBS.
Costs and Expenses
For the three months ended SeptemberJune 30, 2017,2020, costs and expenses of our Investing and Servicing Segment decreased $18.5$11.8 million to $40.1$29.0 million, compared to $58.6$40.8 million for the three months ended SeptemberJune 30, 2016, inclusive of VIE eliminations which were nominal for both periods.2019. The decrease in costs and expenses was primarily due to a decreasedecreases of $5.2 million in general and administrative expenses principally reflecting lower incentive compensation, $4.3 million in costs of rental operations, depreciation and the divestiture of our European servicingamortization due to fewer properties held and advisory business.$2.3 million in interest expense on borrowings related to properties held and conduit loans.
Other Income
For the three months ended SeptemberJune 30, 2017,2020, other income of our Investing and Servicing Segment increased $28.9$20.8 million to $108.5$47.8 million, including additive net VIE eliminations of $40.3 million, from $79.6 million including additive net VIE eliminations of $44.3compared to $27.0 million for the three months ended SeptemberJune 30, 2016.2019. The increase in other income in the third quarter of 2017 compared to the third quarter of 2016 was primarily due to (i) realized and unrealized gains totaling $27.9 million resulting from the sale in April 2020 of a $28.2 million increaseportion of our unconsolidated equity interest in earnings from an unconsolidated investor entity which owns equitya servicing and advisory business, as further described in an online real estate company (see Note 7 to the Condensed Consolidated Financial Statements),Statements, (ii) an $11.2a $7.4 million gain on sale of twoan operating properties,property in the second quarter of 2020, (iii) a $9.4$6.5 million lesser decreasefavorable change in fair value of servicing rights primarily reflecting the effect of VIE eliminations on the expected amortization of this deteriorating asset net of increases in fair value due to the attainment of new servicing contracts and (iv) an $8.3a $3.1 million increase in the change in value of net assets related to consolidated VIEs,decreased loss on derivatives which primarily hedge our interest rate risk on conduit loans, all partially offset by (v) a $30.1$15.1 million lesser increase in the fair value of our conduit loans held-for-sale.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 June 30, 2020, corporate expenses decreased $0.2 million to $53.7 million, compared to $53.9 million for the three months ended June 30, 2019.
Corporate Other Income
For the three months ended June 30, 2020, corporate other income decreased $10.8 million to $4.5 million, compared to $15.3 million for the three months ended June 30, 2019. The changedecrease in corporate other income was
73
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 to Starwood Property Trust. The reclassified revenues, along with applicable changes in fair value of investment securities and servicing rights, comprise the other income (loss) caption “Change in net assets related to consolidated VIEs, reflects amounts associated with” which represents our beneficial interest in those consolidated VIEs. The magnitude of the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this numbersecuritization 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 operating resultsInvesting and Servicing Segment is deemed the primary beneficiary and, to a much lesser extent, some CMBS and RMBS trusts for this segment. Before VIE eliminations, there was an increase in fair value of CMBS securities of $14.0 millionwhich the Commercial and $0.6 million inResidential Lending Segment is deemed the three months ended September 30, 2017 and 2016, respectively.primary beneficiary.
Income Tax ProvisionBenefit (Provision)
Historically, ourOur consolidated income tax provisiontaxes principally relatesrelate to the taxable nature of the Investing and Servicing Segment’sour loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs.taxable REIT subsidiaries (“TRSs”). For the three months ended SeptemberJune 30, 2017, we had2020, our income taxes decreased from a tax provision of $9.8$3.5 million compared to a benefit of $1.3 million due to tax provisionlosses of $2.7 millionour TRSs in the second quarter of 2020.
Net Income Attributable to Non-controlling Interests
During the three months ended SeptemberJune 30, 2016. The change primarily reflects an increase in the taxable2020, net income of our TRSs associated with earnings from our interest in an investor entity which owns equity in an online real estate company and sold nearly all of its interestattributable to non-controlling interests increased $7.9 million to $13.3 million, compared to $5.4 million during the three months ended SeptemberJune 30, 2017 (see Notes 7 and 20 to the Condensed Consolidated Financial Statements).
Corporate
Costs and Expenses
For the three months ended September 30, 2017, corporate expenses increased $9.3 million to $64.3 million, compared to $55.0 million for the three months ended September 30, 2016.2019. The increase was primarily due to (i)non-controlling interests in earnings of a $5.5consolidated CMBS joint venture in which we hold a 51% interest.
Six Months Ended June 30, 2020 Compared to the Six Months Ended June 30, 2019
Commercial and Residential Lending Segment
Revenues
For the six months ended June 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 ended June 30, 2019. This increase was primarily due to an increase in interest expense principally on our 2021 Senior Notes issued in December 2016,income from loans of $24.9 million, partially offset by a decrease in interest expense on our reduced term loan borrowings,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) a $3.2 million increasehigher 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 management fees.interest income from investment securities was primarily due to lower prepayment related income and lower average LIBOR rates.
Costs and Expenses
70
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Lending Segment
Revenues
For the ninesix months ended SeptemberJune 30, 2017, revenues2020, costs and expenses of our Commercial and Residential Lending Segment increased $14.0$30.8 million to $397.2$169.0 million, compared to $383.2$138.2 million for the ninesix months ended SeptemberJune 30, 2016.2019. This increase was primarily due to (i) an $11.7a $49.4 million increase in interest income from loans principally due to higher average loan balancescredit loss provision and LIBOR rates,a $3.2 million increase in general and administrative expenses, partially offset by lower levels of prepayment related income and (ii) a $1.9 million increase in interest income principally from CMBS and RMBS investments.
Costs and Expenses
For the nine months ended September 30, 2017, costs and expenses of our Lending Segment decreased $0.1 million to $87.3 million, compared to $87.4 million for the nine months ended September 30, 2016. This decrease was primarily due to a $6.6$24.3 million decrease in our loan loss allowance, partially offset by (i) a $4.8 million increase in interest expense associated with the various secured financing facilities used to fund a portion of ourthis segment’s investment portfolio and (ii) a $1.3 millionportfolio. The increase in general, administrativethe credit loss provision was due to the recognition of current expected credit losses (“CECL”) during the six months ended June 30, 2020 in accordance with the new credit loss accounting standard effective January 1, 2020 (see Notes 2 and other expenses. 4 to the Condensed Consolidated Financial Statements). The CECL provision in the first half of 2020 was magnified by the
74
significant deterioration in macroeconomic forecasts between the January 1 CECL effective date and the June 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 Nine Months Ended |
|
|
| ||||
|
| September 30, |
|
|
| ||||
|
| 2017 |
| 2016 |
| Change | |||
Interest income from loans |
| $ | 360,188 |
| $ | 348,460 |
| $ | 11,728 |
Interest income from investment securities |
|
| 35,870 |
|
| 33,975 |
|
| 1,895 |
Interest expense |
|
| (72,372) |
|
| (67,585) |
|
| (4,787) |
Net interest income |
| $ | 323,686 |
| $ | 314,850 |
| $ | 8,836 |
For the ninesix months ended SeptemberJune 30, 2017,2020, net interest income of our Commercial and Residential Lending Segment increased $8.8$40.9 million to $323.7$282.7 million, compared to $314.9$241.8 million for the ninesix months ended SeptemberJune 30, 2016.2019. This increase reflects the net increase in interest income explained inand the Revenues discussion above, partially offset by the increasedecrease in interest expense, on our secured financing facilities. both as discussed in the sections above.
During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities were 7.4% and 7.9%, respectively. as follows:
| | | | | |
| | 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 decrease in theoverall weighted average unlevered yield is primarily due towas lower as higher levels of prepayment related income and declineswere more than offset by decreases in interest rate spreads, which exceeded the benefits of increases in LIBOR for the nine months ended September 30, 2017.LIBOR.
During the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, 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 3.8%3.1% and 3.4%4.6%, respectively, and 3.7% and 3.2%, respectively, excluding the impact of bridge financing.respectively. The increasesdecrease in borrowing rates primarily reflect increasesreflects decreases in LIBOR.
Other Income (Loss)
For the ninesix months ended SeptemberJune 30, 2017,2020, other income (loss) of our Commercial and Residential Lending Segment increased $3.3decreased $41.0 million to income of $0.3 million, compared to a loss of $3.0$33.2 million compared to income of $7.8 million for the ninesix months ended SeptemberJune 30, 2016. The increase2019. This decrease was primarily due to (i) a $51.9$25.4 million favorable changeincrease in foreign currency gain (loss),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 $48.1$22.8 million unfavorablefavorable 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 unfavorablefavorable change fromin gain (loss) on derivatives reflects a $55.5$41.2 million unfavorable changeincreased gain on foreign currency hedges, partially offset by a $7.4an $18.4 million decreased loss onunfavorable change in interest rate swaps. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments. The favorable change in foreign currencyincreased gain (loss) and the unfavorable change on the foreign currency hedges and the increased foreign currency loss reflect the overall weakening of the U.S.
71
dollar against the GBP in the nine months ended September 30, 2017 versus a strengthening of the U.S. dollar against the GBP and EUR in the nine months ended September 30, 2016.first half of 2020 versus a lesser strengthening of the U.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.
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Infrastructure Lending Segment
Revenues
For the six months ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2020 in accordance with the new credit loss accounting standard effective January 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 | | 2019 | |
Loans and investment securities held-for-investment | | 5.6 | % | 6.2 | % |
Loans held-for-sale | | 3.6 | % | 4.0 | % |
During the six months ended June 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.
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Other Loss
For the six months ended June 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 ended June 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 period | ||||||||||
|
| Revenues |
| Cost and expenses |
| Other income (loss) |
| Income (loss) before income taxes | ||||
Master Lease Portfolio |
| $ | 722 |
| $ | 668 |
| $ | (2,354) |
| $ | (2,300) |
Medical Office Portfolio |
|
| 49,549 |
|
| 55,084 |
|
| (4,187) |
|
| (9,722) |
Ireland Portfolio |
|
| (378) |
|
| (1,227) |
|
| (18,756) |
|
| (17,907) |
Woodstar Portfolio |
|
| 4,249 |
|
| (11,898) |
|
| (9,102) |
|
| 7,045 |
Investment in unconsolidated entities |
|
| — |
|
| — |
|
| (36,095) |
|
| (36,095) |
Other/Corporate |
|
| — |
|
| 723 |
|
| — |
|
| (723) |
Total |
| $ | 54,142 |
| $ | 43,350 |
| $ | (70,494) |
| $ | (59,702) |
| | | | | | | | | | | | | | | |
|
| $ 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 |
Revenues
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 ninesix months ended SeptemberJune 30, 2017,2020, revenues of our Property Segment increased $54.1decreased $15.3 million to $139.2$127.7 million, compared to $85.1$143.0 million for the ninesix months ended SeptemberJune 30, 2016.2019. The increasedecrease in revenues in the nine months ended September 30, 2017 was primarily due to the full period inclusionsale of the Ireland Portfolio in December 2019, partially offset by increased rental income for the Medical Office Portfolio, which was acquired in December 2016, and the Woodstar Portfolio, which was acquired over a period from October 2015 through April 2016. The Master Lease Portfolio was acquired on September 25, 2017.Portfolios due to rental rate increases effective May 2019.
Costs and Expenses
For the ninesix months ended SeptemberJune 30, 2017,2020, costs and expenses of our Property Segment increased $43.3decreased $13.9 million to $140.6$121.8 million, compared to $97.3$135.7 million for the ninesix months ended SeptemberJune 30, 2016.2019. The increasedecrease in costs and expenses primarily reflects increases of $10.4 million in depreciation and amortization, $16.9 million in other rental related costs and $16.3 million in interest expense, all primarily due to the full period inclusionsale of the Medical OfficeIreland Portfolio and Woodstar Portfolio, partially offset by lower amortization related to the Woodstar Portfolio’s in-place lease intangible asset, which is now fully amortized. in December 2019.
Other Income (Loss)Loss
For the ninesix months ended SeptemberJune 30, 2017,2020, other income (loss)loss of our Property Segment decreased $70.5$15.8 million to a loss of $61.0$36.8 million, compared to income of $9.5$52.6 million for the ninesix months ended SeptemberJune 30, 2016.2019. The decrease in other income (loss)loss was primarily due to (i) a $36.1$42.8 million unfavorable changeloss in earnings (loss)the 2019 period that did not recur in the 2020 period from unconsolidated entities due to decreasesour investment in fair value of the propertiesRetail Fund. Our investment in the Retail Fund (ii)was written off as of December 31, 2019 due to continued declines in the estimated fair values of its properties. Partially offsetting the effect of the Retail Fund was a $25.4$25.0 million increased loss on derivatives, primarily related to foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio andconsisting 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 (iii)(ii) the non-recurrence of an $8.4a $6.5 million bargain purchase gain recognized on the Woodstar Portfolio in the second2019 first quarter on foreign exchange contracts which hedged our Euro currency exposure with respect to the Ireland Portfolio.
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Investing and Servicing Segment and VIEs
Revenues
For the ninesix months ended SeptemberJune 30, 2017,2020, revenues of our Investing and Servicing Segment decreased $31.3$44.0 million to $100.6 million after consolidated VIE eliminations of $140.7$88.6 million, compared to $131.9 million after consolidated VIE eliminations of $136.7$132.6 million for the ninesix months ended SeptemberJune 30, 2016. The VIE eliminations are merely a function of the number of CMBS trusts consolidated in any given period, and as such, are not a meaningful
72
indicator of the operating results for this segment.2019. The decrease in revenues in the nine months of 2017 was primarily due to decreases of $23.4$28.1 million in servicing fees, $9.7 million in rental income from our REIS Equity Portfolio due to fewer properties held and $15.7an owned hotel which was closed during the quarter due to COVID-19 and $6.3 million in interest income from conduit loans and CMBS, investments, partially offset bywhich reflects a $12.2 million increase in rental income on our expanded REIS Equity Portfolio. The $23.4$5.9 million decrease in servicing fees is primarily due to the divestiture of our European servicing and advisory business in October 2016 and lower domestic servicing fees. The $15.7 million decrease in CMBS interest income reflects a $5.2 million increase in VIE eliminations related to the CMBS trusts we consolidate. Excluding the effect of these eliminations, CMBS interest income decreased by $10.5 million, reflecting a lower level of CMBS interest recoveries from asset liquidations by CMBS trusts.on CMBS.
Costs and Expenses
For the ninesix months ended SeptemberJune 30, 2017,2020, costs and expenses of our Investing and Servicing Segment decreased $16.5$13.6 million to $115.9$65.9 million, compared to $132.4$79.5 million for the ninesix months ended SeptemberJune 30, 2016, inclusive of VIE eliminations which were nominal for both periods.2019. The decrease in costs and expenses was primarily due to a $26.5 million decrease in general and administrative expenses principally reflecting the divestituredecreases of our European servicing and advisory business and lower incentive compensation, partially offset by increases of $4.3$7.5 million in costs of rental operations, $3.5depreciation and amortization due to fewer properties held, $3.4 million in depreciationgeneral and amortizationadministrative expenses reflecting lower incentive compensation and $2.9 million in interest expense all primarilyon borrowings related to our expanded REIS Equity Portfolio. properties held and conduit loans.
Other Income
For the ninesix months ended SeptemberJune 30, 2017,2020, other income of our Investing and Servicing Segment increased $172.4decreased $50.7 million to $291.3$1.9 million, including additive net VIE eliminations of $147.4 million, from $118.9 million including additive net VIE eliminations of $137.4compared to $52.6 million for the ninesix months ended SeptemberJune 30, 2016.2019. The increasedecrease in other income in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to (i) a $108.7$73.2 million increase in theunfavorable change in fair value of net assets relatedCMBS investments primarily due to consolidated VIEs,widening credit spreads resulting from market disruption and dislocation caused by the impacts of COVID-19, (ii) a $53.9$12.5 million increase in earnings from an unconsolidated investor entity which owns equity in an online real estate company (see Note 7 to the Condensed Consolidated Financial Statements), (iii) a $16.3 million gain on sale of four operating properties, (iv) a $14.2 million decrease inincreased loss on derivatives which principallyprimarily hedge our interest rate risk on conduit loans and (v) an $11.9(iii) a $5.6 million lesser decreaseincrease in fair value of conduit loans, all partially offset by (iv) realized and unrealized gains totaling $27.9 million resulting from the sale in April 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 primarily reflectingand (vi) a $6.5 million increased gain on sale of operating properties.
Corporate and Other Items
Corporate Costs and Expenses
For the effect of VIE eliminations onsix months ended June 30, 2020, corporate expenses increased $18.9 million to $127.0 million, compared to $108.1 million for the expected amortization of this deteriorating asset net of increases in fair valuesix months ended June 30, 2019. The increase was primarily due to the attainment of new servicing contracts, all partially offset by (vi) a $24.1$17.6 million lesser increase in management fees.
Corporate Other Income
For the fair valuesix months ended June 30, 2020, corporate other income increased $8.9 million to $33.7 million, compared to $24.8 million for the six months ended June 30, 2019. The increase in corporate other income was primarily due to increased gains on interest rate swaps which hedge a portion of our conduit loans held-for-sale. The change in net assets relatedunsecured senior notes used to consolidated VIEs reflects amounts associated withrepay variable-rate secured financing.
Securitization VIE Eliminations
Refer to the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this number is merely a functionpreceding comparison of the number of CMBS trusts consolidated in any given period, and as such, is notthree months ended June 30, 2020 to the three months ended June 30, 2019 for a meaningful indicatordiscussion of the operating results for this segment. Beforenature of securitization VIE eliminations, there was an increase in fair value of CMBS securities of $45.3 million and a decrease of $43.4 million in the nine months ended September 30, 2017 and 2016, respectively.eliminations.
Income Tax ProvisionBenefit (Provision)
Historically, ourOur consolidated income tax provisiontaxes principally relatesrelate to the taxable nature of the Investing and Servicing Segment’sour loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs.taxable REIT subsidiaries
78
(“TRSs”). For the ninesix months ended SeptemberJune 30, 2017, we had2020, our income taxes decreased from a tax provision of $18.3$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 ended June 30, 2020, net income attributable to non-controlling interests increased $2.2 million to $13.8 million, compared to a tax provision of $3.5$11.6 million induring the ninesix months ended SeptemberJune 30, 2016. The change primarily reflects an increase in the taxable income of our TRSs associated with earnings from our interest in an investor entity which owns equity in an online real estate company and sold nearly all of its interest during the nine months ended September 30, 2017 (see Notes 7 and 20 to the Condensed Consolidated Financial Statements).
73
Corporate
Costs and Expenses
For the nine months ended September 30, 2017, corporate expenses increased $18.8 million to $180.7 million, compared to $161.9 million for the nine months ended September 30, 2016.2019. The increase was primarily due to (i)non-controlling interests in earnings of a $16.4 million increaseconsolidated CMBS joint venture in interest expense principally on our 2021 Senior Notes issued in December 2016, partially offset bywhich we hold a decrease in interest expense on our reduced term loan borrowings, and (ii) a $3.3 million increase in management fees. 51% interest.
Other Income (Loss)
For the nine months ended September 30, 2017, corporate other loss was $5.9 million, compared to income of $1.8 million for the nine months ended September 30, 2016. Corporate other loss of $5.9 million in the nine months ended September 30, 2017 represents a loss on repurchase of $230.0 million of our 2018 Convertible Notes (see Note 10 to the Condensed Consolidated Financial Statements). Corporate other income of $1.8 million for the nine months ended September 30, 2016 principally represents a reimbursement received related to a partnership guarantee arrangement.
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; |
(v) | any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net |
(vi) | any deductions for distributions payable with respect to equity securities of subsidiaries issued in exchange for properties or interests therein. |
As previously disclosed, we exclude from Core Earnings any deferred income taxes for transactions which are deemed to be either unusual in nature or infrequent in occurrence, as such terms are utilized in ASC 740, until such time as the tax provision related to the discrete item is realized. During the three months ended June 30, 2017, we reflected an adjustment to Core Earnings for a $9.9 million deferred income tax provision associated with unrealized earnings we recorded from our interest in an investor entity which owns equity in an online real estate company. During the three months ended September 30, 2017, 88% of our interest in this entity was sold, and we recognized an additional $8.4 million income tax provision related to this discrete item, for a total income tax provision of $18.3 million during the nine months ended September 30, 2017 (see Notes 7 and 20 to the Condensed Consolidated Financial Statements). As a result, during the three months ended September 30, 2017, $9.4 million of the previously deferred $9.9 million income tax provision was recognized for Core Earnings purposes, and the incremental $8.4 million recorded during the quarter was unadjusted. The remaining deferred income tax amount of $0.5 million relates to the 12% portion of our investment which we retained and will continue to be deferred for Core Earnings purposes until the remaining investment is sold.
The repurchase of our 2018 Notes in March 2017 was considered to be an unrealized event for Core Earnings purposes because the 2018 Notes were effectively exchanged for the 2023 Notes, thereby simply extending the term of this debt. As such, consistent with the above definition, we have deferred the $5.9 million GAAP loss on extinguishment of debt included in our GAAP results for the nine months ended September 30, 2017 and will amortize this loss over the term of our 2023 Notes.
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
74
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.
In assessing the appropriateThe weighted average diluted share count to applyapplied to Core Earnings for purposes of determining Core Earnings per share (“EPS”), management considered is computed using the following attributes of our current GAAP diluted share methodology: (i) our unvested stock awards representing participating securities were determined to be anti-dilutive and were thus excluded fromcount, 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 Core Earnings. In order to |
79
effectuate dilution from these awards in the Core Earnings computation, we adjust the GAAP diluted share count to include these shares. |
(ii) | Convertible Notes – Conversion of our Convertible Notes is an event that is contingent upon numerous factors, none of which are in our control, and is an event that may or may not occur. Consistent with the treatment of other unrealized adjustments to Core Earnings, we adjust the GAAP diluted share count to exclude the potential shares issuable upon conversion until a conversion occurs. |
(iii) | Subsidiary equity – The intent of a February 2018 amendment to our management agreement (the “Amendment”) is to treat subsidiary equity in the same manner as if parent equity had been issued. The Class A Units issued in connection with the acquisition of assets in our Woodstar II Portfolio are currently excluded from our GAAP diluted share count, with the subsidiary equity represented as non-controlling interests in consolidated subsidiaries on our GAAP balance sheet. Consistent with the Amendment, we adjust GAAP diluted share count to include these subsidiary units. |
The following table presents our diluted weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Core EPS calculation (amounts in thousands):
|
|
|
|
|
|
|
|
| |||||||||
|
| For the Three Months Ended |
| For the Nine Months Ended | |||||||||||||
|
| September 30, |
| September 30, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | |||||||||
| | | | | | | | | | ||||||||
| | For the Three Months Ended | | For the Six Months Ended | | ||||||||||||
| | June 30, | | June 30, | | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | ||||||||
Diluted weighted average shares - GAAP |
| 262,437 |
| 241,091 |
| 262,055 |
| 240,982 | | 291,293 | | 289,072 | | 281,440 | | 288,529 | |
Add: Unvested stock awards |
| 1,807 |
| 1,419 |
| 1,558 |
| 1,644 | | 2,794 | | 2,092 | | 2,635 | | 2,172 | |
Less: Conversion spread value |
| (2,313) |
| (3,445) |
| (2,284) |
| (3,766) | |||||||||
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 |
| 261,931 |
| 239,065 |
| 261,329 |
| 238,860 |
| 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 occurredbecame effective during the ninesix months ended SeptemberJune 30, 2017.2020.
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.
75
TableIn January 2019, our 2019 Convertible Notes were fully repaid in shares of Contentscommon stock and cash. The equity portion of the 2019 Convertible Notes had been fully amortized.
The following table summarizes our quarterly Core Earnings per weighted average diluted share for the ninesix months ended SeptemberJune 30, 20172020 and 2016:2019:
|
|
|
|
|
|
|
|
|
|
|
| Core Earnings For the Three-Month Periods Ended | |||||||
|
| March 31 |
| June 30 |
| September 30 | |||
2017 |
| $ | 0.51 |
| $ | 0.52 |
| $ | 0.65 |
2016 |
|
| 0.50 |
|
| 0.50 |
|
| 0.59 |
| | | | | | |
| | 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.
80
Three Months Ended SeptemberJune 30, 20172020 Compared to the Three Months Ended SeptemberJune 30, 20162019
The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended SeptemberJune 30, 2017,2020, by business segment (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
| ||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
| ||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Total | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||
|
| Commercial |
| |
| |
| |
| |
| | |||||||||||||||||||||
| | and | | | | | | | | | | | | | | | | ||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | |||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | |||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Total | |||||||||||||||||||||
Revenues |
| $ | 146,012 |
| $ | 47,827 |
| $ | 72,214 |
| $ | — |
| $ | 266,053 | | $ | 168,367 | | $ | 19,909 | | $ | 63,624 | | $ | 44,090 | | $ | — | | $ | 295,990 |
Costs and expenses |
|
| (34,438) |
|
| (49,304) |
|
| (40,215) |
|
| (64,330) |
|
| (188,287) | |
| (64,191) | |
| (14,112) | |
| (61,105) | |
| (28,992) | | | (53,747) | |
| (222,147) |
Other income (loss) |
|
| 571 |
|
| (45,008) |
|
| 68,191 |
|
| — |
|
| 23,754 | |
| 33,358 | |
| (1,245) | |
| (6,656) | |
| 47,822 | |
| 4,517 | |
| 77,796 |
Income (loss) before income taxes |
|
| 112,145 |
|
| (46,485) |
|
| 100,190 |
|
| (64,330) |
|
| 101,520 | |
| 137,534 | |
| 4,552 | |
| (4,137) | |
| 62,920 | | | (49,230) | |
| 151,639 |
Income tax benefit (provision) |
|
| 11 |
|
| — |
|
| (9,827) |
|
| — |
|
| (9,816) | ||||||||||||||||||
Income tax (provision) benefit | |
| (3,257) | |
| (56) | |
| — | |
| 4,611 | | | — | |
| 1,298 | |||||||||||||||
Income attributable to non-controlling interests |
|
| (357) |
|
| — |
|
| (2,919) |
|
| — |
|
| (3,276) | |
| (4) | |
| — | |
| (5,111) | |
| (8,166) | |
| — | |
| (13,281) |
Net income (loss) attributable to Starwood Property Trust, Inc. |
|
| 111,799 |
|
| (46,485) |
|
| 87,444 |
|
| (64,330) |
|
| 88,428 | | | 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 |
|
| 783 |
|
| 33 |
|
| 1,015 |
|
| 3,379 |
|
| 5,210 | | | 1,436 | | | 481 | | | 58 | | | 1,247 | | | 4,130 | |
| 7,352 |
Management incentive fee |
|
| — |
|
| — |
|
| — |
|
| 10,378 |
|
| 10,378 | ||||||||||||||||||
Acquisition and investment pursuit costs |
|
| 74 |
|
| 151 |
|
| 49 |
|
| — |
|
| 274 | | | 206 | | | — | | | (88) | | | (72) | | | — | |
| 46 |
Depreciation and amortization |
|
| 17 |
|
| 18,102 |
|
| 4,600 |
|
| — |
|
| 22,719 | | | 370 | | | 79 | | | 19,236 | | | 3,337 | | | — | |
| 23,022 |
Loan loss allowance, net |
|
| (171) |
|
| — |
|
| — |
|
| — |
|
| (171) | ||||||||||||||||||
Credit loss provision, net | | | 11,294 | | | (1,092) | | | — | | | — | | | — | |
| 10,202 | |||||||||||||||
Interest income adjustment for securities |
|
| (225) |
|
| — |
|
| 5,071 |
|
| — |
|
| 4,846 | | | 1,149 | | | — | | | — | | | 1,627 | | | — | |
| 2,776 |
Income tax adjustment for discrete transactions |
|
| — |
|
| — |
|
| (9,356) |
|
| — |
|
| (9,356) | ||||||||||||||||||
Extinguishment of debt, net | | | — | | | — | | | — | | | — | | | (247) | | | (247) | |||||||||||||||
Income tax provision (benefit) associated with fair value adjustments | | | 1,914 | | | — | | | — | | | (392) | | | — | | | 1,522 | |||||||||||||||
Other non-cash items |
|
| — |
|
| (496) |
|
| 187 |
|
| — |
|
| (309) | | | 4 | | | — | | | (485) | | | 230 | | | 156 | |
| (95) |
Reversal of unrealized (gains) / losses on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Loans held-for-sale |
|
| 397 |
|
| — |
|
| (19,882) |
|
| — |
|
| (19,485) | ||||||||||||||||||
Reversal of GAAP unrealized (gains) / losses on: | | | | | | | | | | | | | | | | | | | |||||||||||||||
Loans | | | (33,010) | | | — | | | — | | | (1,440) | | | — | |
| (34,450) | |||||||||||||||
Securities |
|
| (276) |
|
| — |
|
| (13,962) |
|
| — |
|
| (14,238) | | | (5,454) | | | — | | | — | | | (7,941) | | | — | | | (13,395) |
Derivatives |
|
| 10,394 |
|
| 11,291 |
|
| 1,555 |
|
| — |
|
| 23,240 | | | 11,043 | | | 420 | | | 3,401 | | | 3,524 | | | (240) | |
| 18,148 |
Foreign currency |
|
| (10,657) |
|
| 1 |
|
| (4) |
|
| — |
|
| (10,660) | | | (6,942) | | | (310) | | | 48 | | | 31 | | | — | |
| (7,173) |
Earnings from unconsolidated entities |
|
| (848) |
|
| 33,731 |
|
| (30,225) |
|
| — |
|
| 2,658 | ||||||||||||||||||
Purchases and sales of properties |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — | ||||||||||||||||||
Recognition of realized gains / (losses) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Loans held-for-sale |
|
| (397) |
|
| — |
|
| 19,330 |
|
| — |
|
| 18,933 | ||||||||||||||||||
(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 |
|
| — |
|
| — |
|
| (2,657) |
|
| — |
|
| (2,657) | | | — | | | — | | | — | | | (181) | | | — | |
| (181) |
Derivatives |
|
| (290) |
|
| (140) |
|
| (500) |
|
| (247) |
|
| (1,177) | | | 4,522 | | | — | | | (369) | | | (10) | | | — | |
| 4,143 |
Foreign currency |
|
| 549 |
|
| — |
|
| (240) |
|
| — |
|
| 309 | | | (1,969) | | | 52 | | | (50) | | | (31) | | | — | |
| (1,998) |
Earnings from unconsolidated entities |
|
| 849 |
|
| — |
|
| 52,921 |
|
| — |
|
| 53,770 | ||||||||||||||||||
Purchases and sales of properties |
|
| — |
|
| — |
|
| (1,838) |
|
| — |
|
| (1,838) | ||||||||||||||||||
(Loss) earnings from unconsolidated entities | | | (24) | | | (733) | | | — | | | 12,992 | | | — | |
| 12,235 | |||||||||||||||
Sales of properties | | | — | | | — | | | — | | | (5,789) | | | — | |
| (5,789) | |||||||||||||||
Core Earnings (Loss) |
| $ | 111,998 |
| $ | 16,188 |
| $ | 93,508 |
| $ | (50,820) |
| $ | 170,874 | | $ | 112,478 | | $ | 4,511 | | $ | 17,614 | | $ | 36,970 | | $ | (45,431) | | $ | 126,142 |
Core Earnings (Loss) per Weighted Average Diluted Share |
| $ | 0.43 |
| $ | 0.06 |
| $ | 0.36 |
| $ | (0.20) |
| $ | 0.65 | | $ | 0.38 | | $ | 0.02 | | $ | 0.06 | | $ | 0.12 | | $ | (0.15) | | $ | 0.43 |
7681
The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended SeptemberJune 30, 2016,2019, by business segment (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
|
| ||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
|
| ||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Total | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||||
|
| Commercial |
| | |
| |
| |
| |
| | ||||||||||||||||||||
| | and | | | | | | | | | | | | | | | | ||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | |||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | |||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Total | |||||||||||||||||||||
Revenues |
| $ | 128,101 |
| $ | 29,237 |
| $ | 91,879 |
| $ | — |
| $ | 249,217 | | $ | 187,780 | | $ | 26,166 | | $ | 72,414 | | $ | 65,633 | | $ | 6 | | $ | 351,999 |
Costs and expenses |
|
| (30,719) |
|
| (31,684) |
|
| (58,580) |
| (55,027) |
|
| (176,010) | |
| (69,029) | | | (21,524) | | | (68,212) | | | (40,784) | | | (53,947) | | | (253,496) | |
Other income (loss) |
|
| 2,212 |
|
| (2,272) |
|
| 35,304 |
| 234 |
|
| 35,478 | |
| 8,811 | | | (3,456) | | | (10,111) | | | 26,986 | | | 15,309 | | | 37,539 | |
Income (loss) before income taxes |
|
| 99,594 |
|
| (4,719) |
|
| 68,603 |
| (54,793) |
|
| 108,685 | |
| 127,562 | | | 1,186 | | | (5,909) | | | 51,835 | | | (38,632) | | | 136,042 | |
Income tax provision |
|
| — |
|
| — |
|
| (2,667) |
| — |
|
| (2,667) | |||||||||||||||||||
(Income) loss attributable to non-controlling interests |
|
| (352) |
|
| — |
|
| 100 |
|
| — |
|
| (252) | ||||||||||||||||||
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. |
|
| 99,242 |
|
| (4,719) |
|
| 66,036 |
| (54,793) |
|
| 105,766 | | | 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 |
|
| 824 |
|
| 27 |
|
| 1,298 |
| 5,986 |
|
| 8,135 | | | 911 | | | 563 | | | 77 | | | 1,702 | | | 3,811 | | | 7,064 | |
Management incentive fee |
|
| — |
|
| — |
|
| — |
| 6,303 |
|
| 6,303 | |||||||||||||||||||
Acquisition and investment pursuit costs |
|
| — |
|
| 727 |
|
| 89 |
| 12 |
|
| 828 | | | (24) | | | — | | | (88) | | | (305) | | | (356) | | | (773) | |
Depreciation and amortization |
|
| — |
|
| 10,908 |
|
| 3,791 |
| — |
|
| 14,699 | | | 285 | | | — | | | 23,416 | | | 4,822 | | | — | | | 28,523 | |
Loan loss allowance, net |
|
| 2,127 |
|
| — |
|
| — |
| — |
|
| 2,127 | |||||||||||||||||||
Credit loss provision, net | | | 2,096 | | | 422 | | | — | | | — | | | — | | | 2,518 | |||||||||||||||
Interest income adjustment for securities |
|
| (236) |
|
| — |
|
| 3,874 |
| — |
|
| 3,638 | | | (194) | | | — | | | — | | | 3,381 | | | — | | | 3,187 | |
Extinguishment of debt, net | | | — | | | — | | | — | | | — | | | (246) | | | (246) | |||||||||||||||
Other non-cash items |
|
| — |
|
| (108) |
|
| 230 |
| — |
|
| 122 | | | — | | | — | | | (452) | | | 371 | | | 150 | | | 69 | |
Reversal of unrealized (gains) / losses on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Loans held-for-sale |
|
| — |
|
| — |
|
| (49,996) |
| — |
|
| (49,996) | |||||||||||||||||||
Reversal of GAAP unrealized (gains) / losses on: | | | | | | | | | | | | | | | | | | | |||||||||||||||
Loans | | | (5,363) | | | — | | | — | | | (16,528) | | | — | | | (21,891) | |||||||||||||||
Securities |
|
| (207) |
|
| — |
|
| (620) |
| — |
|
| (827) | | | 948 | | | — | | | — | | | (15,815) | | | — | | | (14,867) | |
Derivatives |
|
| (5,624) |
|
| 4,720 |
|
| 1,932 |
| — |
|
| 1,028 | | | (5,519) | | | 2,833 | | | 12,717 | | | 6,927 | | | (15,858) | | | 1,100 | |
Foreign currency |
|
| 3,839 |
|
| 7 |
|
| (632) |
| — |
|
| 3,214 | | | 6,927 | | | 83 | | | 8 | | | (1) | | | — | | | 7,017 | |
Earnings from unconsolidated entities |
|
| (852) |
|
| (2,455) |
|
| (617) |
| — |
|
| (3,924) | | | (5,492) | | | — | | | (1,044) | | | (2,754) | | | — | | | (9,290) | |
Recognition of realized gains / (losses) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Loans held-for-sale |
|
| — |
|
| — |
|
| 52,919 |
| — |
|
| 52,919 | |||||||||||||||||||
Recognition of Core realized gains / (losses) on: | | | | | | | | | | | | | | | | | | | |||||||||||||||
Loans | | | (550) | | | (755) | | | — | | | 20,155 | | | — | | | 18,850 | |||||||||||||||
Securities |
|
| — |
|
| — |
|
| (3,259) |
| — |
|
| (3,259) | | | 597 | | | — | | | — | | | (423) | | | — | | | 174 | |
Derivatives |
|
| 7,436 |
|
| 44 |
|
| (6,042) |
| — |
|
| 1,438 | | | 736 | | | (2,228) | | | 1,484 | | | (7,614) | | | — | | | (7,622) | |
Foreign currency |
|
| (6,145) |
|
| (7) |
|
| 632 |
| — |
|
| (5,520) | | | (1,205) | | | 64 | | | (8) | | | 1 | | | — | | | (1,148) | |
Earnings from unconsolidated entities |
|
| 852 |
|
| 2,487 |
|
| 1,100 |
|
| — |
|
| 4,439 | | | 4,682 | | | — | | | — | | | 4,137 | | | — | | | 8,819 |
Core Earnings (Loss) |
| $ | 101,256 |
| $ | 11,631 |
| $ | 70,735 |
| $ | (42,492) |
| $ | 141,130 | | $ | 124,544 | | $ | 2,354 | | $ | 30,201 | | $ | 47,887 | | $ | (51,131) | | $ | 153,855 |
Core Earnings (Loss) per Weighted Average Diluted Share |
| $ | 0.42 |
| $ | 0.05 |
| $ | 0.30 |
| $ | (0.18) |
| $ | 0.59 | | $ | 0.42 | | $ | 0.01 | | $ | 0.10 | | $ | 0.16 | | $ | (0.17) | | $ | 0.52 |
82
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment’s Core Earnings increaseddecreased by $10.7$12.0 million, from $101.3$124.5 million during the thirdsecond quarter of 20162019 to $112.0$112.5 million in the thirdsecond quarter of 2017.2020. After making adjustments for the calculation of Core Earnings, revenues were $145.8$169.5 million, costs and expenses were $33.7$50.9 million and other incomeloss was $0.3$4.8 million.
Core revenues, consisting principally of interest income on loans, increaseddecreased by $17.9$18.1 million in the thirdsecond quarter of 2017,2020, primarily due to (i) a $19.6 million increasedecreases in interest income from loans principally due to higher average loan balancesof $12.9 million and LIBOR rates, partially offset by (ii) a $1.7 millioninvestment 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 CMBSinvestment securities was primarily due to lower prepayment related income and RMBS investments.lower average LIBOR rates.
Core costs and expenses increaseddecreased by $6.0$14.9 million in the thirdsecond quarter of 2017,2020, primarily due to an increasea $16.7 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of ourthis segment’s investment portfolio.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.
77
Core other income (loss) decreased by $1.2$9.4 million in the second quarter of 2020, primarily due to an unfavorable changea $5.1 million core loss on a residential loan securitization in gain (loss) on foreign currency derivatives partially offset bythe second quarter of 2020 and a favorable change$4.7 million decrease in foreign currency gain (loss).earnings from unconsolidated entities.
PropertyInfrastructure Lending Segment
Core Earnings by Portfolio (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
|
|
| ||||
|
| September 30, |
|
|
| ||||
|
| 2017 |
| 2016 |
| Change | |||
Master Lease Portfolio |
| $ | 334 |
| $ | — |
| $ | 334 |
Medical Office Portfolio |
|
| 6,651 |
|
| — |
|
| 6,651 |
Ireland Portfolio |
|
| 4,538 |
|
| 5,041 |
|
| (503) |
Woodstar Portfolio |
|
| 5,312 |
|
| 4,690 |
|
| 622 |
Investment in unconsolidated entities |
|
| — |
|
| 2,489 |
|
| (2,489) |
Other/Corporate |
|
| (647) |
|
| (589) |
|
| (58) |
Core Earnings |
| $ | 16,188 |
| $ | 11,631 |
| $ | 4,557 |
The PropertyInfrastructure Lending Segment’s Core Earnings increased by $4.6$2.1 million, from $11.6 million during the third quarter of 2016 to $16.2$2.4 million in the thirdsecond quarter of 2017.2019 to $4.5 million in the second quarter of 2020. After making adjustments for the calculation of Core Earnings, revenues were $47.5$19.9 million, costs and expenses were $31.2$14.6 million and other loss was $0.1$0.7 million.
Core revenues, increasedconsisting principally of interest income on loans, decreased by $18.8$6.3 million in the thirdsecond quarter of 2017,2020, primarily due to the inclusiondecreases in interest income from loans of rental$6.2 million and investment securities of $0.2 million. The decrease in interest income for the Medical Office Portfolio acquired in December 2016.from loans was primarily due to lower average LIBOR rates.
Core costs and expenses increaseddecreased by $11.6$5.9 million in the thirdsecond quarter of 2017, primarily due to increases in rental related costs of $5.5 million and interest expense of $5.9 million primarily on the secured financing for the Medical Office Portfolio.
Core other income decreased by $2.6 million to a loss in the third quarter of 2017,2020, primarily due to a decrease in equity in earnings recognized from ourinterest 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 $2.8 million in the Retail Fund.second quarter of 2020, primarily due to 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.
Investing and Servicing
83
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 Investing and ServicingProperty Segment’s Core Earnings increaseddecreased by $22.8$12.6 million, from $70.7$30.2 million during the thirdsecond quarter of 20162019 to $93.5$17.6 million in the thirdsecond quarter of 2017.2020. After making adjustments for the calculation of Core Earnings, revenues were $77.4$63.2 million, costs and expenses were $34.5$42.3 million and other loss was $3.3 million.
Core revenues decreased by $9.1 million in the second quarter of 2020, primarily due to the sale of the Ireland Portfolio in December 2019.
Core costs and expenses decreased by $2.8 million in the second quarter of 2020, primarily due to the sale of the Ireland Portfolio in December 2019.
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 $72.7$15.0 million, income tax provisionbenefit was $19.2$4.2 million and the deduction of income attributable to non-controlling interests was $2.9$3.6 million.
Core revenues decreased by $18.5$23.3 million in the thirdsecond quarter of 2017,2020, primarily due to decreases of $14.6 million in servicing fees reflecting the divestiture of our European servicing and advisory business in October 2016 and lower domestic workout and liquidation fees, $2.3 million in interest income from our CMBS portfolio and $2.3$9.3 million in interest income from conduit loans partially offset by a $2.0and CMBS, $7.3 million increasein servicing fees and $6.5 million in rental income onfrom our expanded REIS Equity Portfolio. 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 $18.8$9.9 million in the thirdsecond quarter of 2017,2020, primarily due to a decreasedecreases of $4.7 million in general and administrative expenses reflecting lower incentive compensation, $2.8 million in costs of rental operations due to fewer properties held and the divestiture of our European servicing$2.3 million in interest expense on borrowings related to properties held and advisory business.conduit loans.
.
7884
Core other income increasedincludes profit realized upon securitization of loans by $42.0 million principally due to (i) a $52.4 million realized gain from an unconsolidated investor entity which owns equity in an online real estate company and sold nearly all of its interest during the third quarter of 2017, (ii) a $10.9 million decrease in amortization of servicing rights, (iii) an $8.8 million increase in realizedour conduit business, gains on sales of CMBS and operating properties, gains and CMBS and (iv) a $4.7 million decrease in realized 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 foreign currency gain (loss),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 partially offsetchanges 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 (v) a $33.6$0.1 million decrease in realized gains on conduit loans.the second quarter of 2020.
Income taxes, which principally relate to the operating resultstaxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are heldhoused in TRSs, increased $16.5decreased $6.1 million from a provision of $1.9 million to a benefit of $4.2 million due to an increase in the taxable incometax losses of our TRSs primarily associated with realized gains from our interest in an investor entity which owns equity in an online real estate company and sold nearly all of its interest during the thirdsecond quarter of 2017.2020.
Income attributable to non-controlling interests increased $3.0$3.5 million primarily duerelating to minority investors’ shareincome of gains from two operating properties sold during the third quarter of 2017.a consolidated CMBS joint venture in which we hold a 51% interest.
Corporate
Core corporate costs and expenses increaseddecreased by $8.3$5.7 million, from $42.5$51.1 million during the second quarter of 2019 to $45.4 million in the thirdsecond quarter of 2016 to $50.8 million in the third quarter of 2017,2020 primarily due to increasesa favorable change in realized gain (loss) on interest expenserate swaps which hedge a portion of $5.8 million and base management fees of $1.8 million. our unsecured senior notes used to repay variable-rate secured financing.
7985
NineSix Months Ended SeptemberJune 30, 20172020 Compared to the NineSix Months Ended SeptemberJune 30, 20162019
The following table presents our summarized results of operations and reconciliation to Core Earnings for the ninesix months ended SeptemberJune 30, 2017,2020, by business segment (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
|
| Investing |
|
|
|
| |||||||||||||||||||||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
| |||||||||||||||||||||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Total | |||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | ||||||||||||||||
| | Commercial |
| |
| |
| |
| |
| | |||||||||||||||||||||
| | and | | | | | | | | | | | | | | | | ||||||||||||||||
| | Residential | | Infrastructure | | | | Investing | | | | | |||||||||||||||||||||
| | Lending | | Lending | | Property | | and Servicing | | | | | |||||||||||||||||||||
| | Segment | | Segment | | Segment | | Segment | | Corporate | | Total | |||||||||||||||||||||
Revenues |
| $ | 397,179 |
| $ | 139,225 |
| $ | 241,327 |
| $ | — |
| $ | 777,731 | | $ | 379,804 | | $ | 43,166 | | $ | 127,707 | | $ | 88,585 | | $ | — | | $ | 639,262 |
Costs and expenses |
|
| (87,308) |
|
| (140,647) |
|
| (116,315) |
|
| (180,714) |
|
| (524,984) | |
| (168,971) | | | (40,191) | |
| (121,767) | | | (65,920) | | | (126,960) | |
| (523,809) |
Other income (loss) |
|
| 258 |
|
| (60,957) |
|
| 143,956 |
|
| (5,916) |
|
| 77,341 | ||||||||||||||||||
Other (loss) income | |
| (33,183) | | | (2,593) | |
| (36,848) | | | 1,904 | | | 33,752 | |
| (36,968) | |||||||||||||||
Income (loss) before income taxes |
|
| 310,129 |
|
| (62,379) |
|
| 268,968 |
|
| (186,630) |
|
| 330,088 | |
| 177,650 | | | 382 | |
| (30,908) | | | 24,569 | | | (93,208) | |
| 78,485 |
Income tax provision |
|
| (331) |
|
| — |
|
| (17,954) |
|
| — |
|
| (18,285) | ||||||||||||||||||
Income tax benefit | |
| 1,165 | | | 89 | |
| — | | | 6,773 | | | — | |
| 8,027 | |||||||||||||||
Income attributable to non-controlling interests |
|
| (1,064) |
|
| — |
|
| (2,573) |
|
| — |
|
| (3,637) | |
| (7) | | | — | |
| (10,222) | | | (3,396) | | | — | |
| (13,625) |
Net income (loss) attributable to Starwood Property Trust, Inc. |
|
| 308,734 |
|
| (62,379) |
|
| 248,441 |
|
| (186,630) |
|
| 308,166 | |
| 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 |
|
| 2,353 |
|
| 82 |
|
| 2,491 |
|
| 8,340 |
|
| 13,266 | |
| 2,548 | | | 947 | | | 131 | | | 2,510 | | | 10,016 | | | 16,152 |
Management incentive fee |
|
| — |
|
| — |
|
| — |
|
| 20,183 |
|
| 20,183 | |
| — | | | — | | | — | | | — | | | 15,799 | | | 15,799 |
Acquisition and investment pursuit costs |
|
| 74 |
|
| 162 |
|
| 91 |
|
| — |
|
| 327 | | | 564 | | | — | | | (177) | | | (72) | | | — | | | 315 |
Depreciation and amortization |
|
| 50 |
|
| 52,982 |
|
| 13,441 |
|
| — |
|
| 66,473 | |
| 725 | | | 130 | | | 38,617 | | | 7,144 | | | — | | | 46,616 |
Loan loss allowance, net |
|
| (3,170) |
|
| — |
|
| — |
|
| — |
|
| (3,170) | ||||||||||||||||||
Credit loss provision, net | |
| 51,511 | | | 7,360 | | | — | | | — | | | — | | | 58,871 | |||||||||||||||
Interest income adjustment for securities |
|
| (697) |
|
| — |
|
| 9,436 |
|
| — |
|
| 8,739 | |
| 1,273 | | | — | | | — | | | 7,942 | | | — | | | 9,215 |
Income tax adjustment for discrete transactions |
|
| — |
|
| — |
|
| 555 |
|
| — |
|
| 555 | ||||||||||||||||||
Extinguishment of debt, net | | | — | | | — | | | — | | | — | | | (493) | | | (493) | |||||||||||||||
Income tax benefit associated with fair value adjustment | | | (3,907) | | | — | | | — | | | (1,834) | | | — | | | (5,741) | |||||||||||||||
Other non-cash items |
|
| — |
|
| (1,665) |
|
| 1,005 |
|
| 5,916 |
|
| 5,256 | | | 7 | | | — | | | (976) | | | 478 | | | 312 | | | (179) |
Reversal of unrealized (gains) / losses on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Loans held-for-sale |
|
| 549 |
|
| — |
|
| (46,033) |
|
| — |
|
| (45,484) | ||||||||||||||||||
Reversal of GAAP unrealized (gains) / losses on: | | | | | | | | | | | | | | | | | | | |||||||||||||||
Loans | |
| 2,507 | | | — | | | — | | | (20,823) | | | — | | | (18,316) | |||||||||||||||
Securities |
|
| (189) |
|
| — |
|
| (45,263) |
|
| — |
|
| (45,452) | |
| 22,425 | | | — | | | — | | | 39,275 | | | — | | | 61,700 |
Derivatives |
|
| 28,897 |
|
| 31,510 |
|
| 2,056 |
|
| — |
|
| 62,463 | |
| (19,520) | | | 1,433 | | | 33,970 | | | 22,537 | | | (27,889) | | | 10,531 |
Foreign currency |
|
| (28,402) |
|
| (16) |
|
| (16) |
|
| — |
|
| (28,434) | |
| 27,059 | | | 163 | | | 67 | | | 24 | | | — | | | 27,313 |
Earnings from unconsolidated entities |
|
| (2,548) |
|
| 28,782 |
|
| (67,134) |
|
| — |
|
| (40,900) | ||||||||||||||||||
Purchases and sales of properties |
|
| — |
|
| — |
|
| (613) |
|
| — |
|
| (613) | ||||||||||||||||||
Recognition of realized gains / (losses) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Loans held-for-sale |
|
| (549) |
|
| — |
|
| 48,950 |
|
| — |
|
| 48,401 | ||||||||||||||||||
(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 |
|
| — |
|
| — |
|
| 8,332 |
|
| — |
|
| 8,332 | |
| — | | | — | | | — | | | (4,393) | | | — | | | (4,393) |
Derivatives |
|
| 14,567 |
|
| (18) |
|
| (1,251) |
|
| (493) |
|
| 12,805 | |
| 7,772 | | | 118 | | | (404) | | | (6,097) | | | — | | | 1,389 |
Foreign currency |
|
| (12,655) |
|
| 16 |
|
| (1,138) |
|
| — |
|
| (13,777) | |
| (6,240) | | | (142) | | | (69) | | | (24) | | | — | | | (6,475) |
Earnings from unconsolidated entities |
|
| 2,529 |
|
| 3,563 |
|
| 55,774 |
|
| — |
|
| 61,866 | ||||||||||||||||||
Purchases and sales of properties |
|
| — |
|
| (153) |
|
| 611 |
|
| — |
|
| 458 | ||||||||||||||||||
(Loss) earnings from unconsolidated entities | |
| (580) | | | (733) | | | — | | | 16,730 | | | — | | | 15,417 | |||||||||||||||
Sales of properties | |
| — | | | — | | | — | | | (5,789) | | | — | | | (5,789) | |||||||||||||||
Core Earnings (Loss) |
| $ | 309,543 |
| $ | 52,866 |
| $ | 229,735 |
| $ | (152,684) |
| $ | 439,460 | | $ | 260,731 | | $ | 10,803 | | $ | 40,251 | | $ | 71,966 | | $ | (95,463) | | $ | 288,288 |
Core Earnings (Loss) per Weighted Average Diluted Share |
| $ | 1.18 |
| $ | 0.20 |
| $ | 0.88 |
| $ | (0.58) |
| $ | 1.68 | | $ | 0.88 | | $ | 0.04 | | $ | 0.14 | | $ | 0.24 | | $ | (0.32) | | $ | 0.98 |
8086
The following table presents our summarized results of operations and reconciliation to Core Earnings for the ninesix months ended SeptemberJune 30, 2016,2019, by business segment (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | | | | |
|
| 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) | | $ | 110,662 | | $ | (103,007) | | $ | 236,805 |
Core Earnings (Loss) per Weighted Average Diluted Share | | $ | 0.80 | | $ | 0.02 | | $ | (0.04) | | $ | 0.38 | | $ | (0.35) | | $ | 0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Investing |
|
|
|
| |||||
|
| Lending |
| Property |
| and Servicing |
|
|
|
| |||||
|
| Segment |
| Segment |
| Segment |
| Corporate |
| Total | |||||
Revenues |
| $ | 383,175 |
| $ | 85,083 |
| $ | 268,658 |
| $ | — |
| $ | 736,916 |
Costs and expenses |
|
| (87,406) |
|
| (97,297) |
|
| (131,930) |
|
| (161,894) |
|
| (478,527) |
Other income (loss) |
|
| (3,005) |
|
| 9,537 |
|
| (18,463) |
|
| 1,784 |
|
| (10,147) |
Income (loss) before income taxes |
|
| 292,764 |
|
| (2,677) |
|
| 118,265 |
|
| (160,110) |
|
| 248,242 |
Income tax provision |
|
| (75) |
|
| — |
|
| (3,392) |
|
| — |
|
| (3,467) |
(Income) loss attributable to non-controlling interests |
|
| (1,050) |
|
| — |
|
| 171 |
|
| — |
|
| (879) |
Net income (loss) attributable to Starwood Property Trust, Inc. |
|
| 291,639 |
|
| (2,677) |
|
| 115,044 |
|
| (160,110) |
|
| 243,896 |
Add / (Deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash equity compensation expense |
|
| 2,110 |
|
| 89 |
|
| 3,785 |
|
| 16,893 |
|
| 22,877 |
Management incentive fee |
|
| — |
|
| — |
|
| — |
|
| 13,770 |
|
| 13,770 |
Acquisition and investment pursuit costs |
|
| — |
|
| 1,421 |
|
| 904 |
|
| 12 |
|
| 2,337 |
Depreciation and amortization |
|
| — |
|
| 41,997 |
|
| 8,918 |
|
| — |
|
| 50,915 |
Loan loss allowance, net |
|
| 3,395 |
|
| — |
|
| — |
|
| — |
|
| 3,395 |
Interest income adjustment for securities |
|
| (740) |
|
| — |
|
| 10,620 |
|
| — |
|
| 9,880 |
Other non-cash items |
|
| — |
|
| (10,922) |
|
| 247 |
|
| — |
|
| (10,675) |
Reversal of unrealized (gains) / losses on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
| — |
|
| — |
|
| (70,122) |
|
| — |
|
| (70,122) |
Securities |
|
| 37 |
|
| — |
|
| 43,449 |
|
| — |
|
| 43,486 |
Derivatives |
|
| (19,807) |
|
| 6,837 |
|
| 16,330 |
|
| — |
|
| 3,360 |
Foreign currency |
|
| 23,501 |
|
| 41 |
|
| (2,962) |
|
| — |
|
| 20,580 |
Earnings from unconsolidated entities |
|
| (2,544) |
|
| (7,313) |
|
| (3,280) |
|
| — |
|
| (13,137) |
Recognition of realized gains / (losses) on: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held-for-sale |
|
| — |
|
| — |
|
| 71,390 |
|
| — |
|
| 71,390 |
Securities |
|
| — |
|
| — |
|
| (11,136) |
|
| — |
|
| (11,136) |
Derivatives |
|
| 33,311 |
|
| (26) |
|
| (15,858) |
|
| — |
|
| 17,427 |
Foreign currency |
|
| (31,916) |
|
| (41) |
|
| 2,825 |
|
| — |
|
| (29,132) |
Earnings from unconsolidated entities |
|
| 3,148 |
|
| 4,820 |
|
| 2,855 |
|
| — |
|
| 10,823 |
Core Earnings (Loss) |
| $ | 302,134 |
| $ | 34,226 |
| $ | 173,009 |
| $ | (129,435) |
| $ | 379,934 |
Core Earnings (Loss) per Weighted Average Diluted Share |
| $ | 1.26 |
| $ | 0.14 |
| $ | 0.73 |
| $ | (0.54) |
| $ | 1.59 |
87
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment’s Core Earnings increased by $7.4$27.2 million, from $302.1$233.5 million during the ninesix months ended September 30, 2016of 2019 to $309.5$260.7 million duringin the ninesix months ended September 30, 2017.of 2020. After making adjustments for the calculation of Core Earnings, revenues were $396.5$381.1 million, costs and expenses were $88.0$113.6 million and other incomeloss was $2.5$4.0 million.
Core revenues, consisting principally of interest income on loans, increased by $14.0$18.9 million duringin the ninesix months ended September 30, 2017,of 2020, primarily due to (i) an $11.7 million 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 average loan balances and LIBOR rates, partially offset by lower levels of prepayment related income and (ii) a $1.9 million increasehigher 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 principally from CMBSinvestment securities was primarily due to lower prepayment related income and RMBS investments.lower average LIBOR rates.
81
Core costs and expenses increaseddecreased by $6.1$20.6 million duringin the ninesix months ended September 30, 2017,of 2020, primarily due to (i) a $4.8$24.3 million increasedecrease in interest expense associated with the various secured financing facilities used to fund a portion of ourthis segment’s investment portfolio and (ii) a $1.1 million increase inprimarily 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 slightly by $0.3 million.$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.
PropertyInfrastructure Lending Segment
Core Earnings by Portfolio (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended |
|
|
| ||||
|
| September 30, |
|
|
| ||||
|
| 2017 |
| 2016 |
| Change | |||
Master Lease Portfolio |
| $ | 320 |
| $ | — |
| $ | 320 |
Medical Office Portfolio |
|
| 19,854 |
|
| — |
|
| 19,854 |
Ireland Portfolio |
|
| 14,248 |
|
| 15,130 |
|
| (882) |
Woodstar Portfolio |
|
| 16,957 |
|
| 15,771 |
|
| 1,186 |
Investment in unconsolidated entities |
|
| 3,563 |
|
| 4,821 |
|
| (1,258) |
Other/Corporate |
|
| (2,076) |
|
| (1,496) |
|
| (580) |
Core Earnings |
| $ | 52,866 |
| $ | 34,226 |
| $ | 18,640 |
The PropertyInfrastructure Lending Segment’s Core Earnings increased by $18.7$5.0 million, from $34.2$5.8 million duringin the ninesix months ended September 30, 2016of 2019 to $52.9$10.8 million duringin the ninesix months ended September 30, 2017.of 2020. After making adjustments for the calculation of Core Earnings, revenues were $138.1$43.2 million, costs and expenses were $88.0$31.7 million and other incomeloss was $2.8$0.7 million.
Core revenues, increasedconsisting principally of interest income on loans, decreased by $56.0$11.5 million duringin the ninesix months ended September 30, 2017,of 2020, primarily due to the inclusiondecreases 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 full periodresult of rental income for the Medical Office Portfoliosales and the Woodstar Portfolio.repayments and a decrease in average LIBOR rates partially offset by an increase in average spreads on our infrastructure loans.
Core costs and expenses increased by $34.7 million during the nine months ended September 30, 2017, primarily due to increases in rental related costs of $16.8 million and interest expense of $16.4 million primarily on the secured financing for the Medical Office Portfolio.
Core other income decreased by $2.6$11.3 million duringin the ninesix months ended September 30, 2017,of 2020, primarily due to a decrease in equity in earnings recognized from ourinterest 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 Retail Fund.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.
Investing and Servicing
88
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 Investing and ServicingProperty Segment’s Core Earnings increased by $56.7$50.3 million, from $173.0a loss of $10.1 million during the ninesix months ended September 30, 2016of 2019 to $229.7income of $40.2 million duringin the ninesix months ended September 30, 2017.of 2020. After making adjustments for the calculation of Core Earnings, revenues were $250.8$126.8 million, costs and expenses were $99.3$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 in December 2019, partially offset by increased rental income in the Woodstar Portfolios due to rental rate increases effective May 2019.
Core costs and expenses decreased by $4.9 million in the six months of 2020, primarily due to the sale of the Ireland Portfolio in December 2019.
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 the Retail 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 $98.2$37.2 million, income tax provisionbenefit was $17.4$4.9 million and the deduction of income attributable to non-controlling interests was $2.6$10.8 million.
Core revenues decreased by $28.7$45.3 million duringin the ninesix months ended September 30, 2017,of 2020, primarily due to decreases of $24.3$28.1 million in servicing fees, reflecting the divestiture of our European servicing and advisory business and lower domestic servicing fees, $11.8 million in interest income from our CMBS portfolio and $1.9$7.7 million in interest income from conduit loans partially offset by a $12.0and CMBS and $9.6 million increase in rental income onfrom our expanded REIS Equity Portfolio. 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 $18.9$10.5 million duringin the ninesix months ended September 30, 2017,of 2020, primarily due to a decreasedecreases 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 the divestiture of our European servicing and advisory business and lower incentive compensation, partially offset by increases in costs of rental operations and interest expense on secured financings for CMBS and the REIS Equity Portfolio.compensation.
82
Core other income increaseddecreased by $83.2$0.2 million principally due to (i) a $52.4 million realized gain from an unconsolidated investor entity which owns equity in an online real estate company and sold nearly allthe six months of its interest during the third quarter of 2017, (ii) a $34.5 million increase in realized gains on sales of operating properties and CMBS, (iii) a $10.5 million decrease in realized losses on derivatives net of foreign currency gain (loss) and (iv) a $9.9 million decrease in amortization of servicing rights, all partially offset by (v) a $22.4 million decrease in realized gains on conduit loans.2020.
Income taxes, which principally relate to the operating resultstaxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are heldhoused in TRSs, increased $14.0decreased $7.2 million from a provision of $2.3 million to a benefit of $4.9 million due to an increase in the taxable incometax losses of our TRSs primarily associated with realized gains from our interest in an investor entity which owns equity in an online real estate company and sold nearly allthe six months of its interest during the third quarter2020.
89
Income attributable to non-controlling interests increased $2.7$10.9 million primarily duerelating to minority investors’ shareincome of gains from two operating properties sold during the third quarter of 2017.a consolidated CMBS joint venture in which we hold a 51% interest.
Corporate
Core corporate costs and expenses increaseddecreased by $23.3$7.5 million, from $129.4$103.0 million during the ninesix months ended September 30, 2016of 2019 to $152.7$95.5 million duringin the ninesix months ended September 30, 2017,of 2020 primarily due to increasesa favorable change in realized gain (loss) on interest expenserate swaps which hedge a portion of $16.9 million and base management fees of $5.3 million.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 since December 31, 2016.2019. 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 ended March 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 ended June 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.
90
Our primary sources of liquidity are as follows:
Cash Flows for the NineSix Months Ended SeptemberJune 30, 20172020 (amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| VIE |
| Excluding Investing | ||
|
| GAAP |
| Adjustments |
| and Servicing VIEs | |||
Net cash used in operating activities |
| $ | (222,428) |
| $ | (4,013) |
| $ | (226,441) |
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
Origination and purchase of loans held-for-investment |
|
| (2,195,258) |
|
| — |
|
| (2,195,258) |
Proceeds from principal collections and sale of loans |
|
| 1,707,238 |
|
| — |
|
| 1,707,238 |
Purchase of investment securities |
|
| (69,231) |
|
| (80,770) |
|
| (150,001) |
Proceeds from sales and collections of investment securities |
|
| 221,037 |
|
| 81,880 |
|
| 302,917 |
Real estate business combinations, net of cash and restricted cash acquired |
|
| (18,194) |
|
| (19,039) |
|
| (37,233) |
Proceeds from sale of properties |
|
| 44,219 |
|
| — |
|
| 44,219 |
Purchases and additions to properties and other assets |
|
| (564,755) |
|
| — |
|
| (564,755) |
Net cash flows from other investments and assets |
|
| (34,057) |
|
| — |
|
| (34,057) |
Net cash used in investing activities |
|
| (909,001) |
|
| (17,929) |
|
| (926,930) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
| 4,090,163 |
|
| — |
|
| 4,090,163 |
Principal repayments on and repurchases of borrowings |
|
| (2,724,179) |
|
| — |
|
| (2,724,179) |
Payment of deferred financing costs |
|
| (17,038) |
|
| — |
|
| (17,038) |
Proceeds from common stock issuances, net of offering costs |
|
| (106) |
|
| — |
|
| (106) |
Payment of dividends |
|
| (376,061) |
|
| — |
|
| (376,061) |
Contributions from non-controlling interests |
|
| 105 |
|
| — |
|
| 105 |
Distributions to non-controlling interests |
|
| (7,519) |
|
| — |
|
| (7,519) |
Issuance of debt of consolidated VIEs |
|
| 11,657 |
|
| (11,657) |
|
| — |
Repayment of debt of consolidated VIEs |
|
| (92,383) |
|
| 92,383 |
|
| — |
Distributions of cash from consolidated VIEs |
|
| 62,797 |
|
| (62,797) |
|
| — |
Net cash provided by financing activities |
|
| 947,436 |
|
| 17,929 |
|
| 965,365 |
Net decrease in cash, cash equivalents and restricted cash |
|
| (183,993) |
|
| (4,013) |
|
| (188,006) |
Cash, cash equivalents and restricted cash, beginning of period |
|
| 650,755 |
|
| (1,148) |
|
| 649,607 |
Effect of exchange rate changes on cash |
|
| 1,674 |
|
| — |
|
| 1,674 |
Cash, cash equivalents and restricted cash, end of period |
| $ | 468,436 |
| $ | (5,161) |
| $ | 463,275 |
| | | | | | | | | |
|
| | |
| VIE |
| Excluding Investing | ||
| | GAAP | | Adjustments | | and Servicing VIEs | |||
Net cash provided by operating activities | | $ | 769,738 | | $ | (2,049) | | $ | 767,689 |
Cash Flows from Investing Activities: | | | | | | | | | |
Origination and purchase of loans held-for-investment | |
| (1,666,903) | |
| — | |
| (1,666,903) |
Proceeds from principal collections and sale of loans | |
| 1,434,351 | |
| — | |
| 1,434,351 |
Purchase and funding of investment securities | |
| (16,120) | |
| (222,386) | |
| (238,506) |
Proceeds from sales and collections of investment securities | |
| 58,419 | |
| 61,365 | |
| 119,784 |
Proceeds from sales of real estate | | | 23,805 | | | — | | | 23,805 |
Purchases and additions to properties and other assets | | | (13,914) | | | — | | | (13,914) |
Investment in unconsolidated entities | | | (3,130) | | | — | | | (3,130) |
Proceeds from sale of interest in unconsolidated entities | | | 10,313 | | | — | | | 10,313 |
Net cash flows from other investments and assets | |
| (67,577) | |
| — | |
| (67,577) |
Net cash used in investing activities | |
| (240,756) | |
| (161,021) | |
| (401,777) |
Cash Flows from Financing Activities: | | | | | | | | | |
Proceeds from borrowings | |
| 3,686,932 | |
| — | |
| 3,686,932 |
Principal repayments on and repurchases of borrowings | |
| (3,716,558) | |
| (13,950) | |
| (3,730,508) |
Payment of deferred financing costs | |
| (7,564) | |
| — | |
| (7,564) |
Proceeds from common stock issuances, net of offering costs | |
| 354 | |
| — | |
| 354 |
Payment of dividends | |
| (271,624) | |
| — | |
| (271,624) |
Contributions from non-controlling interests | | | 9,406 | | | — | |
| 9,406 |
Distributions to non-controlling interests | |
| (76,514) | |
| 2,219 | |
| (74,295) |
Purchase of treasury stock | | | (28,830) | | | — | | | (28,830) |
Issuance of debt of consolidated VIEs | |
| 24,376 | |
| (24,376) | |
| — |
Repayment of debt of consolidated VIEs | |
| (236,336) | |
| 236,336 | |
| — |
Distributions of cash from consolidated VIEs | |
| 36,989 | |
| (36,989) | |
| — |
Net cash used in financing activities | |
| (579,369) | |
| 163,240 | |
| (416,129) |
Net decrease in cash, cash equivalents and restricted cash | |
| (50,387) | |
| 170 | |
| (50,217) |
Cash, cash equivalents and restricted cash, beginning of period | |
| 574,031 | |
| (1,221) | |
| 572,810 |
Effect of exchange rate changes on cash | |
| 487 | |
| — | |
| 487 |
Cash, cash equivalents and restricted cash, end of period | | $ | 524,131 | | $ | (1,051) | | $ | 523,080 |
The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of the Investing and Servicing Segment’ssecuritization VIEs under ASC 810. These adjustments principally relate to (i) the purchase of CMBS, RMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP basis and (ii) principal collections of CMBS and RMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP basis. There is no significant net impact to cash flows from operations or to overall cash resulting from these consolidations. Refer to Note 2 of ourto the Condensed Consolidated Financial Statements for further discussion.
Cash and cash equivalents decreased by $188.0$50.2 million during the ninesix months ended SeptemberJune 30, 2017,2020, reflecting net cash used in investing activities of $926.9$401.8 million and net cash used in operatingfinancing activities of $226.5$416.1 million, partially offset by net cash provided by financing activities of $965.4 million.
84
Net cash used in operating activities of $226.5$767.7 million.
Net cash provided by operating activities of $767.7 million forduring the ninesix months ended SeptemberJune 30, 20172020 related primarily to $500.0 millionproceeds from sales of loans held-for-sale, net of originations and purchases, of $600.2 million and cash interest income of $289.8 million from our loans held-for-sale, netand $78.2 million from our investment securities. Net rental income provided cash of proceeds from principal collections$88.6 million and sales,servicing fees provided cash of $17.7 million. Offsetting these cash inflows was cash interest expense of $177.6$202.6 million, general and administrative expenses of $66.5 million, management fees of $65.3$37.0 million and a net change in operating assets and liabilities of $8.1$9.0 million. Offsetting these cash outflows were cash interest income
91
Net cash used in investing activities of $926.9$401.8 million forduring the ninesix months ended SeptemberJune 30, 20172020 related primarily to the origination and acquisition of new loans held-for-investment of $2.2$1.7 billion, the purchase and funding of commercial real estateinvestment securities of $238.5 million and net additions to properties and other assets of $602.0 million and the purchase of investment securities of $150.0$13.9 million, partially offset by proceeds received from principal collections and sales of loans of $1.7$1.4 billion and investment securities of $302.9$119.8 million, proceeds from the sale of real estate of $23.8 million and proceeds from the sale of interest in unconsolidated entities of $10.3 million.
Net cash provided byused in financing activities of $965.4$416.1 million forduring the ninesix months ended SeptemberJune 30, 20172020 related primarily to net borrowings after repayments of our secured and unsecured debt of $1.3 billion, partially offset by dividend distributions of $376.1$271.6 million, net distributions to non-controlling interests of $64.9 million, repayments on our secured debt and deferred loan costs of $51.1 million, net of borrowings, and treasury stock purchases of $28.8 million.
8592
Our Investment Portfolio
The following is a review of our segments for the six months ended June 30, 2020. Refer to the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q for discussion of the potential impacts on us from the COVID-19 pandemic.
Commercial and Residential Lending Segment
The following table sets forth the amount of each category of investments we owned across various property types within our Commercial and Residential Lending Segment as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Unlevered | |
|
| Face |
| Carrying |
| Asset Specific |
| Net |
| |
| Return on | | ||||
| | Amount | | Value | | Financing | | Investment | | Vintage |
| Asset | | ||||
June 30, 2020 | | | | | | | | | | | | | | | | | |
First mortgages (1) | | $ | 8,113,339 | | $ | 8,094,109 | | $ | 4,998,772 | | $ | 3,095,337 |
| 1998-2020 | | 6.3 | % |
Subordinated mortgages | |
| 70,101 | |
| 68,891 | |
| — | |
| 68,891 |
| 1998-2019 | | 8.6 | % |
Mezzanine loans (1) | |
| 593,505 | |
| 593,823 | |
| — | |
| 593,823 |
| 2013-2020 | | 11.7 | % |
Residential loans, fair value option | | | 260,542 | |
| 267,730 | |
| 183,987 | |
| 83,743 | | 2013-2020 | | 6.0 | % |
Other loans | | | 34,452 | |
| 30,804 | |
| — | |
| 30,804 |
| 1999-2017 | | 9.9 | % |
Loans held-for-sale, fair value option, residential | | | 429,966 | |
| 432,786 | |
| 305,148 | |
| 127,638 |
| 2015-2020 | | 6.1 | % |
RMBS, available-for-sale | |
| 266,539 | |
| 174,281 | |
| 31,897 | |
| 142,384 |
| 2003-2007 | | 11.4 | % |
RMBS, fair value option | | | 266,687 | | | 328,270 | (2) | | 27,698 | | | 300,572 | | 2018-2020 | | 8.5 | % |
CMBS, fair value option | | | 110,624 | | | 104,171 | (2) | | 26,056 | | | 78,115 | | 2018 | | 6.6 | % |
HTM debt securities (3) | |
| 508,945 | |
| 507,994 | |
| 105,070 | |
| 402,924 |
| 2014-2019 | | 6.7 | % |
Credit loss allowance | |
| — | |
| (98,830) | |
| — | |
| (98,830) |
| N/A | | | |
Equity security | |
| 11,333 | |
| 9,791 | |
| — | |
| 9,791 |
| N/A | | | |
Investment in unconsolidated entities | |
| N/A | |
| 49,853 | |
| — | |
| 49,853 |
| N/A | | | |
Properties, net | | | N/A | |
| 27,283 | |
| — | |
| 27,283 | | N/A | | | |
| | $ | 10,666,033 | | $ | 10,590,956 | | $ | 5,678,628 | | $ | 4,912,328 | | | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | | | | | |
First mortgages (1) | | $ | 7,961,494 | | $ | 7,926,732 | | $ | 4,715,244 | | $ | 3,211,488 |
| 1998-2019 | | 6.4 | % |
Subordinated mortgages | |
| 77,055 | |
| 75,724 | |
| — | |
| 75,724 |
| 1998-2019 | | 9.5 | % |
Mezzanine loans (1) | |
| 484,408 | |
| 484,164 | |
| — | |
| 484,164 |
| 2013-2019 | | 12.2 | % |
Residential loans, fair value option | | | 654,925 | |
| 671,572 | |
| 425,423 | |
| 246,149 | | 2013-2019 | | 5.9 | % |
Other loans | | | 66,525 | |
| 62,555 | |
| — | |
| 62,555 | | 1999-2018 | | 8.9 | % |
Loans held-for-sale, fair value option, residential | | | 587,144 | |
| 605,384 | |
| 454,223 | |
| 151,161 |
| 2015-2019 | | 5.9 | % |
Credit loss allowance, loans | | | — | |
| (33,415) | |
| — | |
| (33,415) | | N/A | | | |
RMBS, available-for-sale | |
| 278,853 | |
| 189,576 | |
| 102,073 | |
| 87,503 |
| 2003-2007 | | 12.3 | % |
RMBS, fair value option | |
| 87,397 | | | 147,034 | (2) | | 32,292 | | | 114,742 |
| 2018-2019 | | 10.2 | % |
CMBS, fair value option | |
| 118,249 | | | 118,215 | (2) | | 58,801 | | | 59,414 |
| 2018 | | 5.5 | % |
HTM debt securities (3) | |
| 527,338 | |
| 525,485 | |
| 178,880 | |
| 346,605 |
| 2014-2019 | | 7.1 | % |
Equity security | |
| 12,119 | |
| 12,664 | |
| — | |
| 12,664 |
| N/A | | | |
Investment in unconsolidated entities | |
| N/A | |
| 46,921 | |
| — | |
| 46,921 |
| N/A | | | |
Properties, net | | | N/A | |
| 26,834 | |
| — | |
| 26,834 | | N/A | | | |
| | $ | 10,855,507 | | $ | 10,859,445 | | $ | 5,966,936 | | $ | 4,892,509 | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unlevered |
|
|
|
| Face |
| Carrying |
| Asset Specific |
| Net |
|
|
| Return on |
|
| ||||
|
| Amount |
| Value |
| Financing |
| Investment |
| Vintage |
| Asset |
|
| ||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgages (1) |
| $ | 5,546,006 |
| $ | 5,523,316 |
| $ | 2,693,742 |
| $ | 2,829,574 |
| 1989-2017 |
| 6.7 | % |
|
Subordinated mortgages |
|
| 224,088 |
|
| 222,990 |
|
| — |
|
| 222,990 |
| 1998-2015 |
| 11.4 | % |
|
Mezzanine loans (1) |
|
| 615,724 |
|
| 615,562 |
|
| — |
|
| 615,562 |
| 2005-2017 |
| 11.2 | % |
|
Other loans |
|
| 27,073 |
|
| 23,218 |
|
| — |
|
| 23,218 |
| 1999-2017 |
| 12.8 | % |
|
Loans held-for-sale, fair value option |
|
| 408,346 |
|
| 418,618 |
|
| 249,473 |
|
| 169,145 |
| 2013-2017 |
| 5.9 | % |
|
Loans transferred as secured borrowings |
|
| 75,000 |
|
| 74,339 |
|
| 74,200 |
|
| 139 |
| N/A |
|
|
|
|
Loan loss allowance |
|
| — |
|
| (6,618) |
|
| — |
|
| (6,618) |
| N/A |
|
|
|
|
RMBS |
|
| 379,432 |
|
| 253,252 |
|
| 42,216 |
|
| 211,036 |
| 2003-2007 |
| 9.9 | % |
|
HTM securities (2) |
|
| 415,679 |
|
| 411,196 |
|
| 238,432 |
|
| 172,764 |
| 2013-2017 |
| 5.4 | % |
|
Equity security |
|
| 12,244 |
|
| 13,529 |
|
| — |
|
| 13,529 |
| N/A |
|
|
|
|
Investments in unconsolidated entities |
|
| N/A |
|
| 36,831 |
|
| — |
|
| 36,831 |
| N/A |
|
|
|
|
|
| $ | 7,703,592 |
| $ | 7,586,233 |
| $ | 3,298,063 |
| $ | 4,288,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgages (1) |
| $ | 4,861,214 |
| $ | 4,845,552 |
| $ | 1,910,078 |
| $ | 2,935,474 |
| 1989-2016 |
| 6.4 | % |
|
Subordinated mortgages |
|
| 293,925 |
|
| 278,032 |
|
| 4,021 |
|
| 274,011 |
| 1998-2015 |
| 11.5 | % |
|
Mezzanine loans (1) |
|
| 714,608 |
|
| 713,757 |
|
| — |
|
| 713,757 |
| 2006-2016 |
| 10.7 | % |
|
Loans transferred as secured borrowings |
|
| 35,000 |
|
| 35,000 |
|
| 35,000 |
|
| — |
| N/A |
|
|
|
|
Loan loss allowance |
|
| — |
|
| (9,788) |
|
| — |
|
| (9,788) |
| N/A |
|
|
|
|
RMBS |
|
| 399,883 |
|
| 253,915 |
|
| 38,832 |
|
| 215,083 |
| 2003-2007 |
| 10.3 | % |
|
HTM securities (2) |
|
| 515,027 |
|
| 509,980 |
|
| 305,531 |
|
| 204,449 |
| 2013-2015 |
| 6.0 | % |
|
Equity security |
|
| 11,275 |
|
| 12,177 |
|
| — |
|
| 12,177 |
| N/A |
|
|
|
|
Investments in unconsolidated entities |
|
| N/A |
|
| 30,874 |
|
| — |
|
| 30,874 |
| N/A |
|
|
|
|
|
| $ | 6,830,932 |
| $ | 6,669,499 |
| $ | 2,293,462 |
| $ | 4,376,037 |
|
|
|
|
|
|
(1) |
| First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of |
(2) | Eliminated in consolidation against VIE liabilities pursuant to ASC 810. |
93
(3) |
| CMBS held-to-maturity (“HTM”) and mandatorily redeemable preferred equity interests in commercial real estate entities. |
86
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, our Commercial and Residential Lending Segment’s investment portfolio, excluding residential loans, held-for-sale, RMBS, properties and other investments, had the following characteristics based on carrying values:
|
|
|
|
|
| |||||
| | | | | | |||||
Collateral Property Type |
| September 30, 2017 |
| December 31, 2016 |
|
| June 30, 2020 |
| December 31, 2019 | |
Office |
| 40.1 | % | 35.8 | % |
| 37.2 | % | 40.2 | % |
Hotel |
| 22.7 | % | 20.6 | % | |||||
Multifamily |
| 11.9 | % | 12.3 | % | |||||
Residential | | 8.3 | % | 8.7 | % | |||||
Mixed Use |
| 20.8 | % | 15.1 | % |
| 8.0 | % | 7.1 | % |
Hospitality |
| 17.0 | % | 22.9 | % | |||||
Multi-family |
| 10.5 | % | 15.3 | % | |||||
Retail |
| 6.7 | % | 7.0 | % |
| 2.9 | % | 3.5 | % |
Residential |
| 3.3 | % | 1.9 | % | |||||
Industrial |
| 1.6 | % | 2.0 | % |
| 1.3 | % | 0.6 | % |
|
| 100.0 | % | 100.0 | % | |||||
Other | | 7.7 | % | 7.0 | % | |||||
|
| 100.0 | % | 100.0 | % |
|
|
|
|
|
| |||||
| | | | | | |||||
Geographic Location |
| September 30, 2017 |
| December 31, 2016 |
|
| June 30, 2020 |
| December 31, 2019 | |
U.S. Regions: |
| | | | | |||||
North East |
| 35.8 | % | 37.7 | % |
| 24.7 | % | 27.5 | % |
West |
| 22.0 | % | 21.5 | % |
| 21.8 | % | 22.2 | % |
South West |
| 11.4 | % | 8.9 | % |
| 11.1 | % | 10.7 | % |
Mid Atlantic |
| 8.7 | % | 8.3 | % | |||||
South East |
| 10.6 | % | 11.6 | % |
| 8.6 | % | 7.9 | % |
International |
| 9.5 | % | 9.5 | % | |||||
Midwest |
| 5.8 | % | 7.3 | % |
| 4.8 | % | 4.1 | % |
Mid Atlantic |
| 4.9 | % | 3.5 | % | |||||
|
| 100.0 | % | 100.0 | % | |||||
International: |
| | | | | |||||
Europe/Australia |
| 17.3 | % | 16.2 | % | |||||
Bahamas/Bermuda |
| 3.0 | % | 3.1 | % | |||||
|
| 100.0 | % | 100.0 | % |
94
Infrastructure Lending Segment
Property Segment
The following table sets forth the amount of each category of investments which are comprisedwe owned within our Infrastructure Lending Segment as of properties, intangible lease assetsJune 30, 2020 and liabilitiesDecember 31, 2019 (dollars in thousands):
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Unlevered | |
|
| Face |
| Carrying |
| Asset Specific |
| Net |
| Return on | | ||||
| | Amount | | Value | | Financing | | Investment | | Asset | | ||||
June 30, 2020 | | | | | | | | | | | | | | | |
First priority infrastructure loans and HTM securities | | $ | 1,547,019 | | $ | 1,518,884 | | $ | 1,184,269 | | $ | 334,615 |
| 5.1 | % |
Loans held-for-sale, infrastructure | | | 46,111 | |
| 45,001 | |
| 36,732 | |
| 8,269 |
| 3.2 | % |
Credit loss allowance | | | N/A | | | (19,458) | | | — | | | (19,458) | | | |
Investment in unconsolidated entities | | | N/A | | | 24,744 | | | — | | | 24,744 | | | |
| | $ | 1,593,130 | | $ | 1,569,171 | | $ | 1,221,001 | | $ | 348,170 | | | |
| | | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | | | | |
First priority infrastructure loans and HTM securities | | $ | 1,474,052 | | $ | 1,442,601 | | $ | 1,121,065 | | $ | 321,536 |
| 6.4 | % |
Loans held-for-sale, infrastructure | |
| 121,271 | |
| 119,724 | |
| 96,001 | |
| 23,723 |
| 5.1 | % |
Credit loss allowance | | | N/A | | | (196) | | | — | | | (196) | | | |
Investment in unconsolidated entities | | | N/A | | | 25,862 | | | — | | | 25,862 | | | |
| | $ | 1,595,323 | | $ | 1,587,991 | | $ | 1,217,066 | | $ | 370,925 | | | |
As of June 30, 2020 and December 31, 2019, our equityInfrastructure Lending Segment’s investment in four regional shopping malls (the “Retail Fund”)portfolio had the following characteristics based on carrying values:
| | | | | |
Collateral Type |
| June 30, 2020 |
| December 31, 2019 | |
Natural gas power |
| 70.7 | % | 72.6 | % |
Midstream |
| 18.1 | % | 12.8 | % |
Renewable power |
| 7.4 | % | 10.6 | % |
Other thermal power | | 3.8 | % | 4.0 | % |
|
| 100.0 | % | 100.0 | % |
| | | | | |
Geographic Location | | June 30, 2020 | | December 31, 2019 | |
U.S. Regions: | | | | | |
North East |
| 42.8 | % | 43.9 | % |
Midwest |
| 23.4 | % | 25.5 | % |
South West |
| 15.6 | % | 12.6 | % |
South East | | 6.6 | % | 4.8 | % |
West | | 3.8 | % | 4.2 | % |
Mid-Atlantic | | 3.8 | % | 4.0 | % |
International: |
| | | | |
Mexico |
| 2.9 | % | 2.9 | % |
Other |
| 1.1 | % | 2.1 | % |
|
| 100.0 | % | 100.0 | % |
95
Property Segment
The following table sets forth the amount of each category of investments held within our Property Segment as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
|
|
|
|
|
|
| ||||||
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
| | | | | | | ||||||
|
| June 30, 2020 |
| December 31, 2019 | ||||||||
Properties, net |
| $ | 2,234,646 |
| $ | 1,667,108 | | $ | 1,998,759 | | $ | 2,029,024 |
Lease intangibles, net |
|
| 111,997 |
|
| 122,124 | |
| 41,501 | |
| 44,986 |
Investment in unconsolidated entities |
|
| 109,607 |
|
| 124,977 | ||||||
|
| $ | 2,456,250 |
| $ | 1,914,209 | ||||||
| | $ | 2,040,260 | | $ | 2,074,010 |
The following table sets forth our net investment and other information regarding the Property Segment’s properties and intangible lease assets and liabilitiesintangibles as of SeptemberJune 30, 20172020 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
|
|
|
| Asset |
|
|
|
|
| Weighted Average | ||||||||||||||||||
|
| Carrying |
| Specific |
| Net |
| Occupancy |
| Remaining | ||||||||||||||||||
|
| Value |
| Financing |
| Investment |
| Rate |
| Lease Term | ||||||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||
|
| |
| Asset |
| |
| |
| Weighted Average | ||||||||||||||||||
| | Carrying | | Specific | | Net | | Occupancy | | Remaining | ||||||||||||||||||
| | Value | | Financing | | Investment | | Rate | | Lease Term | ||||||||||||||||||
Office—Medical Office Portfolio |
| $ | 768,132 |
| $ | 488,030 |
| $ | 280,102 |
| 94.1 | % |
| 6.0 years | | $ | 760,029 | | $ | 591,353 | | $ | 168,676 | | 92.8 | % | | 6.1 years |
Office—Ireland Portfolio |
|
| 513,953 |
|
| 329,350 |
|
| 184,603 |
| 89.9 | % |
| 8.9 years | ||||||||||||||
Multi-family residential—Ireland Portfolio |
|
| 18,567 |
|
| 12,026 |
|
| 6,541 |
| 92.0 | % |
| 0.3 years | ||||||||||||||
Multi-family residential—Woodstar Portfolio |
|
| 613,685 |
|
| 409,596 |
|
| 204,089 |
| 98.1 | % |
| 0.5 years | ||||||||||||||
Multifamily residential—Woodstar I Portfolio | | | 632,763 | | | 571,920 | | | 60,843 | | 98.3 | % | | 0.5 years | ||||||||||||||
Multifamily residential—Woodstar II Portfolio | | | 606,984 | | | 436,987 | | | 169,997 | | 99.6 | % | | 0.5 years | ||||||||||||||
Retail—Master Lease Portfolio |
|
| 425,190 |
|
| 191,914 |
|
| 233,276 |
| 100.0 | % |
| 24.6 years | | | 343,790 | |
| 192,558 | |
| 151,232 | | 100.0 | % | | 21.8 years |
Industrial—Master Lease Portfolio |
|
| 128,134 |
|
| 70,090 |
|
| 58,044 |
| 100.0 | % |
| 24.6 years | ||||||||||||||
Subtotal—undepreciated carrying value |
|
| 2,467,661 |
|
| 1,501,006 |
|
| 966,655 |
|
|
|
|
| | | 2,343,566 | | | 1,792,818 | | | 550,748 | | | | | |
Accumulated depreciation and amortization |
|
| (121,018) |
|
| — |
|
| (121,018) |
|
|
|
|
| | | (303,306) | | | — | | | (303,306) | | | | | |
Net carrying value |
| $ | 2,346,643 |
| $ | 1,501,006 |
| $ | 845,637 |
|
|
|
|
| | $ | 2,040,260 | | $ | 1,792,818 | | $ | 247,442 | | | | | |
87
As of SeptemberJune 30, 20172020 and December 31, 2016,2019, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:
|
|
|
|
|
| |||||
| | | | | | |||||
Geographic Location |
| September 30, 2017 |
| December 31, 2016 |
| | June 30, 2020 | | December 31, 2019 | |
Ireland |
| 20.9 | % | 25.2 | % | |||||
U.S. Regions: |
|
|
|
|
| |||||
South East |
| 34.5 | % | 39.7 | % | | 62.0 | % | 62.0 | % |
South West |
| 10.3 | % | 10.3 | % | |||||
Midwest |
| 13.1 | % | 6.2 | % |
| 10.1 | % | 10.1 | % |
South West |
| 10.0 | % | 8.7 | % | |||||
North East |
| 9.7 | % | 9.7 | % | |||||
West |
| 9.9 | % | 7.2 | % |
| 7.9 | % | 7.9 | % |
North East |
| 9.6 | % | 13.0 | % | |||||
Mid-Atlantic |
| 2.0 | % | — | % | |||||
|
| 100.0 | % | 100.0 | % | |||||
|
| 100.0 | % | 100.0 | % |
96
Investing and Servicing Segment
The following table sets forth the amount of each category of investments we owned within our Investing and Servicing Segment as of SeptemberJune 30, 20172020 and December 31, 20162019 (amounts in thousands):
| | | | | | | | | | | | | |
|
| | |
| | |
| Asset |
| | |
| |
| | Face | | Carrying | | Specific | | Net |
| ||||
| | Amount | | Value | | Financing | | Investment |
| ||||
June 30, 2020 | | | | | | | | | | | | | |
CMBS, fair value option | | $ | 2,625,096 | | $ | 1,094,613 | (1) | $ | 363,333 | (2) | $ | 731,280 | |
Intangible assets - servicing rights | |
| N/A | |
| 48,809 | (3) |
| — | |
| 48,809 | |
Lease intangibles, net | | | N/A | | | 17,620 | | | — | | | 17,620 | |
Loans held-for-sale, fair value option, commercial | |
| 191,229 | |
| 194,097 | |
| 133,900 | |
| 60,197 | |
Loans held-for-investment | | | 1,153 | | | 1,153 | | | — | | | 1,153 | |
Investment in unconsolidated entities | | | N/A | | | 47,114 | (4) | | — | | | 47,114 | |
Properties, net | |
| N/A | |
| 198,281 | |
| 186,233 | |
| 12,048 | |
| | $ | 2,817,478 | | $ | 1,601,687 | | $ | 683,466 | | $ | 918,221 | |
December 31, 2019 | | | | | | | | | | | | | |
CMBS, fair value option | | $ | 2,897,654 | | $ | 1,177,148 | (1) | $ | 300,705 | | $ | 876,443 | |
Intangible assets - servicing rights | |
| N/A | |
| 43,164 | (3) |
| — | |
| 43,164 | |
Lease intangibles, net | | | N/A | | | 20,060 | | | — | |
| 20,060 | |
Loans held-for-sale, fair value option, commercial | |
| 160,635 | |
| 159,238 | |
| 85,873 | |
| 73,365 | |
Loans held-for-investment | | | 1,294 | | | 1,294 | | | — | | | 1,294 | |
Investment in unconsolidated entities | | | N/A | | | 32,183 | (4) | | — | | | 32,183 | |
Properties, net | |
| N/A | |
| 210,582 | |
| 187,929 | |
| 22,653 | |
| | $ | 3,059,583 | | $ | 1,643,669 | | $ | 574,507 | | $ | 1,069,162 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Asset |
|
|
|
| |
|
| Face |
| Carrying |
| Specific |
| Net |
| ||||
|
| Amount |
| Value |
| Financing |
| Investment |
| ||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fair value option |
| $ | 4,075,324 |
| $ | 1,026,634 | (1) | $ | 173,563 |
| $ | 853,071 |
|
Intangible assets - servicing rights |
|
| N/A |
|
| 60,363 | (2) |
| — |
|
| 60,363 |
|
Lease intangibles, net |
|
| N/A |
|
| 25,722 |
|
| — |
|
| 25,722 |
|
Loans held-for-sale, fair value option |
|
| 192,705 |
|
| 190,006 |
|
| 144,052 |
|
| 45,954 |
|
Loans held-for-investment |
|
| 3,903 |
|
| 3,903 |
|
| — |
|
| 3,903 |
|
Investment in unconsolidated entities |
|
| N/A |
|
| 117,772 |
|
| — |
|
| 117,772 |
|
Properties, net |
|
| N/A |
|
| 286,696 |
|
| 199,318 |
|
| 87,378 |
|
|
| $ | 4,271,932 |
| $ | 1,711,096 |
| $ | 516,933 |
| $ | 1,194,163 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS, fair value option |
| $ | 4,459,655 |
| $ | 990,570 | (1) | $ | 206,651 |
| $ | 783,919 |
|
Intangible assets - servicing rights |
|
| N/A |
|
| 89,320 | (2) |
| — |
|
| 89,320 |
|
Lease intangibles, net |
|
| N/A |
|
| 29,676 |
|
| — |
|
| 29,676 |
|
Loans held-for-sale, fair value option |
|
| 63,065 |
|
| 63,279 |
|
| 33,131 |
|
| 30,148 |
|
Loans held-for-investment |
|
| 20,442 |
|
| 20,442 |
|
| — |
|
| 20,442 |
|
Investment in unconsolidated entities |
|
| N/A |
|
| 56,376 |
|
| — |
|
| 56,376 |
|
Properties, net |
|
| N/A |
|
| 277,612 |
|
| 186,901 |
|
| 90,711 |
|
|
| $ | 4,543,162 |
| $ | 1,527,275 |
| $ | 426,683 |
| $ | 1,100,592 |
|
(1) |
| Includes |
|
|
(2) | Includes $41.3 million of non-controlling interests in the consolidated entities which hold certain debt balances as of June 30, 2020. |
(3) | Includes $34.9 million and $26.2 million of servicing rights intangibles |
(4) | Includes $16.8 million and $20.6 million of investment in unconsolidated entities eliminated in consolidation against VIE assets pursuant to ASC 810 as of June 30, 2020 and December 31, 2019, respectively. |
8897
Our Investing and Servicing Segment’s REIS Equity Portfolio, as defineddescribed in Note 36 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $291.4$200.5 million and $283.5$214.9 million as of SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively:
|
|
|
|
|
| |||||
| | | | | | |||||
Property Type |
| September 30, 2017 |
| December 31, 2016 |
| | June 30, 2020 | | December 31, 2019 | |
Office | | 50.0 | % | 52.7 | % | |||||
Retail |
| 40.6 | % | 45.8 | % |
| 30.5 | % | 28.8 | % |
Office |
| 35.1 | % | 23.9 | % | |||||
Multi-family |
| 12.7 | % | 18.1 | % | |||||
Mixed Use |
| 7.1 | % | 7.5 | % |
| 6.9 | % | 5.8 | % |
Self-storage |
| 4.5 | % | 4.7 | % |
| 6.2 | % | 3.9 | % |
|
| 100.0 | % | 100.0 | % | |||||
Multifamily |
| 4.2 | % | 6.5 | % | |||||
Hotel | | 2.2 | % | 2.3 | % | |||||
|
| 100.0 | % | 100.0 | % |
|
|
|
|
|
| |||||
| | | | | | |||||
Geographic Location |
| September 30, 2017 |
| December 31, 2016 |
| | June 30, 2020 | | December 31, 2019 | |
South West |
| 24.4 | % | 22.0 | % | |||||
North East |
| 24.4 | % | 22.6 | % | |||||
South East |
| 49.6 | % | 51.0 | % |
| 15.8 | % | 22.6 | % |
North East |
| 14.2 | % | 17.3 | % | |||||
South West |
| 12.9 | % | 7.0 | % | |||||
West |
| 15.0 | % | 13.5 | % | |||||
Mid Atlantic |
| 8.8 | % | 9.4 | % |
| 11.8 | % | 8.4 | % |
Midwest |
| 7.6 | % | 8.0 | % |
| 8.6 | % | 10.9 | % |
West |
| 6.9 | % | 7.3 | % | |||||
|
| 100.0 | % | 100.0 | % | |||||
|
| 100.0 | % | 100.0 | % |
98
New Credit Facilities and Amendments
Refer to Notes 9 and 10 of our Condensed Consolidated Financial Statements for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2016.2019.
89
Secured Borrowings
Borrowings under Various Secured Financing Arrangements
The following table is a summary of our secured financing facilitiesborrowings as of SeptemberJune 30, 20172020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Pledged | | | | | | | Approved | | | ||||
| | | | | | Weighted | | Asset | | Maximum | | | | but | | Unallocated | |||||
| | Current | | Extended | | Average | | Carrying | | Facility | | Outstanding | | Undrawn | | Financing | |||||
|
| Maturity |
| Maturity (a) |
| Pricing |
| Value |
| Size |
| Balance |
| Capacity (b) |
| Amount (c) | |||||
Repurchase Agreements: | | | | | | | | | | | | | | | | | | | | | |
Commercial Loans | | Aug 2020 to Jan 2024 | (d) | May 2023 to Mar 2029 | (d) | (e) | | $ | 6,293,458 | | $ | 9,181,700 | (f) | $ | 4,024,642 | | $ | 439,342 | | $ | 4,717,716 |
Residential Loans | | Jun 2022 | | N/A | | LIBOR + 2.58% | | | 10,172 | | | 400,000 | | | 7,669 | | | — | | | 392,331 |
Infrastructure Loans | | Feb 2021 | | N/A | | LIBOR + 2.00% | | | 194,283 | | | 500,000 | | | 160,483 | | | — | | | 339,517 |
Conduit Loans | | Feb 2021 to Jun 2023 | | Feb 2022 to Jun 2024 | | LIBOR + 1.86% | | | 182,001 | | | 350,000 | | | 134,874 | | | — | | | 215,126 |
CMBS/RMBS | | Sep 2020 to Dec 2029 | (g) | Dec 2020 to Jun 2030 | (g) | (h) | | | 1,097,024 | | | 783,641 | | | 563,031 | (i) | | 81,526 | | | 139,084 |
Total Repurchase Agreements | | | | | | | | | 7,776,938 | | | 11,215,341 | | | 4,890,699 | | | 520,868 | | | 5,803,774 |
Other Secured Financing: | | | | | | | | | | | | | | | | | | | | | |
Borrowing Base Facility | | Apr 2022 | | Apr 2024 | | LIBOR + 2.25% | | | 33,445 | | | 650,000 | (j) | | 29,333 | | | — | | | 620,667 |
Commercial Financing Facility | | Mar 2022 | | Mar 2029 | | GBP LIBOR + 1.75% | | | 91,214 | | | 73,650 | | | 73,650 | | | — | | | — |
Infrastructure Acquisition Facility | | Sep 2021 | | Sep 2022 | | (k) | | | 723,690 | | | 737,137 | | | 583,005 | | | — | | | 154,132 |
Infrastructure Financing Facilities | | Jul 2022 to Oct 2022 | | Oct 2024 to Jul 2027 | | LIBOR + 2.11% | | | 567,315 | | | 1,250,000 | | | 462,568 | | | — | | | 787,432 |
Property Mortgages - Fixed rate | | Nov 2024 to Aug 2052 | (l) | N/A | | 3.81% | | | 1,302,670 | | | 1,078,072 | | | 1,077,979 | | | — | | | 93 |
Property Mortgages - Variable rate | | Nov 2021 to Jul 2030 | | N/A | | LIBOR + 2.53% | | | 951,634 | | | 945,400 | | | 926,262 | | | — | | | 19,138 |
Term Loan and Revolver | | (m) | | N/A | | (m) | | | N/A | (m) | | 517,000 | | | 397,000 | | | 120,000 | | | — |
FHLB | | Feb 2021 | | N/A | | 1.99% | | | 690,341 | | | 2,000,000 | | | 481,500 | | | — | | | 1,518,500 |
Collateralized Loan Obligation | | Jul 2038 | | N/A | | LIBOR + 1.34% | | | 1,099,405 | | | 936,375 | | | 936,375 | | | — | | | — |
Total Other Secured Financing | | | | | | | | | 5,459,714 | | | 8,187,634 | | | 4,967,672 | | | 120,000 | | | 3,099,962 |
| | | | | | | | $ | 13,236,652 | | $ | 19,402,975 | | $ | 9,858,371 | | $ | 640,868 | | $ | 8,903,736 |
Unamortized net discount | | | | | | | | | | | | | | | (10,189) | | | | | | |
Unamortized deferred financing costs | | | | | | | | | | | | | | | (82,555) | | | | | | |
| | | | | | | | | | | | | | $ | 9,765,627 | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Pledged |
|
|
|
|
|
|
| Approved |
|
|
| ||
|
|
|
|
|
|
|
| Asset |
| Maximum |
|
|
|
| but |
| Unallocated | ||||
|
| Current |
| Extended |
|
|
| Carrying |
| Facility |
| Outstanding |
| Undrawn |
| Financing | |||||
|
| Maturity |
| Maturity (a) |
| Pricing |
| Value |
| Size |
| Balance |
| Capacity (b) |
| Amount (c) | |||||
Lender 1 Repo 1 |
| (d) |
| (d) |
| LIBOR + 1.75% to 5.75% |
| $ | 1,534,069 |
| $ | 2,000,000 |
| $ | 1,170,141 |
| $ | — |
| $ | 829,859 |
Lender 2 Repo 1 |
| Oct 2017 |
| Oct 2020 |
| LIBOR + 1.75% to 2.75% |
|
| 350,508 |
|
| 500,000 |
|
| 236,055 |
|
| 25,000 |
|
| 238,945 |
Lender 3 Repo 1 |
| May 2018 |
| May 2019 |
| LIBOR + 2.75% to 3.10% |
|
| 110,086 |
|
| 76,820 |
|
| 76,820 |
|
| — |
|
| — |
Lender 4 Repo 2 |
| Dec 2018 |
| Dec 2020 |
| LIBOR + 2.00% to 3.25% |
|
| 571,746 |
|
| 1,000,000 | (e) |
| 221,544 |
|
| 130,213 |
|
| 648,243 |
Lender 6 Repo 1 |
| Aug 2020 |
| N/A |
| LIBOR + 2.50% to 2.75% |
|
| 724,164 |
|
| 600,000 |
|
| 475,555 |
|
| — |
|
| 124,445 |
Lender 6 Repo 2 |
| Nov 2019 |
| Nov 2020 |
| GBP LIBOR + 2.75% |
|
| 173,516 |
|
| 121,280 |
|
| 121,280 |
|
| — |
|
| — |
Lender 9 Repo 1 |
| Dec 2017 |
| Dec 2018 |
| LIBOR + 1.65% |
|
| 340,620 |
|
| 254,447 |
|
| 254,447 |
|
| — |
|
| — |
Lender 10 Repo 1 |
| Mar 2020 |
| Mar 2022 |
| LIBOR + 2.00% to 2.75% |
|
| 169,733 |
|
| 140,000 |
|
| 136,800 |
|
| — |
|
| 3,200 |
Lender 11 Repo 1 |
| Jun 2019 |
| Jun 2020 |
| LIBOR + 2.75% |
|
| — |
|
| 200,000 |
|
| — |
|
| — |
|
| 200,000 |
Lender 11 Repo 2 |
| Sep 2018 |
| Sep 2022 |
| LIBOR + 2.25% to 2.75% |
|
| — |
|
| 250,000 |
|
| — |
|
| — |
|
| 250,000 |
Lender 7 Secured Financing |
| Jul 2018 |
| Jul 2019 |
| LIBOR + 2.75% | (f) |
| 46,800 |
|
| 650,000 | (g) |
| — |
|
| — |
|
| 650,000 |
Lender 8 Secured Financing |
| Aug 2019 |
| N/A |
| LIBOR + 4.00% |
|
| 30,147 |
|
| 75,000 |
|
| 18,226 |
|
| — |
|
| 56,774 |
Conduit Repo 2 |
| Nov 2017 |
| N/A |
| LIBOR + 2.25% |
|
| 53,751 |
|
| 150,000 |
|
| 40,842 |
|
| — |
|
| 109,158 |
Conduit Repo 3 |
| Feb 2018 |
| N/A |
| LIBOR + 2.10% |
|
| 136,254 |
|
| 150,000 |
|
| 103,678 |
|
| — |
|
| 46,322 |
Conduit Repo 4 |
| Oct 2017 |
| Oct 2020 |
| LIBOR + 2.25% |
|
| — |
|
| 100,000 |
|
| — |
|
| — |
|
| 100,000 |
MBS Repo 1 |
| (h) |
| (h) |
| LIBOR + 1.90% |
|
| 10,000 |
|
| 6,510 |
|
| 6,510 |
|
| — |
|
| — |
MBS Repo 2 |
| Jun 2020 |
| N/A |
| LIBOR/EURIBOR + 2.00% to 2.95% |
|
| 261,066 |
|
| 191,184 |
|
| 191,184 |
|
| — |
|
| — |
MBS Repo 3 |
| (i) |
| (i) |
| LIBOR + 1.32% to 1.95% |
|
| 384,546 |
|
| 254,668 |
|
| 254,668 |
|
| — |
|
| — |
MBS Repo 4 |
| (j) |
| N/A |
| LIBOR + 1.20% to 1.90% |
|
| 179,384 |
|
| 225,000 |
|
| 2,000 |
|
| 98,226 |
|
| 124,774 |
Investing and Servicing Segment Property Mortgages |
| Feb 2018 to Jun 2026 |
| N/A |
| Various |
|
| 245,094 |
|
| 201,238 |
|
| 177,217 |
|
| — |
|
| 24,021 |
Ireland Portfolio Mortgage |
| May 2020 |
| N/A |
| EURIBOR + 1.69% |
|
| 491,298 |
|
| 344,525 |
|
| 344,525 |
|
| — |
|
| — |
Woodstar Portfolio Mortgages |
| Nov 2025 to Oct 2026 |
| N/A |
| 3.72% to 3.97% |
|
| 369,519 |
|
| 276,748 |
|
| 276,748 |
|
| — |
|
| — |
Woodstar Portfolio Government Financing |
| Mar 2026 to Jun 2049 |
| N/A |
| 1.00% to 5.00% |
|
| 308,805 |
|
| 133,967 |
|
| 133,967 |
|
| — |
|
| — |
Medical Office Portfolio Mortgages |
| Dec 2021 to Feb 2022 |
| Dec 2023 to Feb 2024 |
| LIBOR + 2.50% | (k) |
| 741,304 |
|
| 527,124 |
|
| 497,613 |
|
| — |
|
| 29,511 |
Master Lease Portfolio Mortgages |
| Oct 2027 |
| N/A |
| 4.36% to 4.38% |
|
| 471,762 |
|
| 265,900 |
|
| 265,900 |
|
| — |
|
| — |
Term Loan A |
| Dec 2020 |
| Dec 2021 |
| LIBOR + 2.25% | (f) |
| 992,366 |
|
| 300,000 |
|
| 300,000 |
|
| — |
|
| — |
Revolving Secured Financing |
| Dec 2020 |
| Dec 2021 |
| LIBOR + 2.25% | (f) |
| — |
|
| 100,000 |
|
| — |
|
| 100,000 |
|
| — |
FHLB |
| Feb 2021 |
| N/A |
| LIBOR + 0.15% to 0.34% |
|
| 338,956 |
|
| 250,000 |
|
| 250,000 |
|
| — |
|
| — |
|
|
|
|
|
|
|
| $ | 9,035,494 |
| $ | 9,344,411 |
|
| 5,555,720 |
| $ | 353,439 |
| $ | 3,435,252 |
Unamortized net premium |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,579 |
|
|
|
|
|
|
Unamortized deferred financing costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (43,604) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 5,514,695 |
|
|
|
|
|
|
(a) |
| Subject to certain conditions as defined in the respective facility agreement. |
(b) |
| Approved but undrawn capacity represents the total draw amount that has been approved by the |
(c) |
| Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the |
(d) |
|
|
(e) | Certain facilities with an outstanding balance of $965.9 million as of June 30, 2020 are indexed to GBP LIBOR and |
(f) |
| The aggregate initial maximum facility size of |
(g) | Certain facilities with an outstanding balance of $310.6 million as of June 30, 2020 carry a rolling 11-month or 12-month term which may reset monthly or quarterly with the lender's consent. These facilities carry no maximum facility size. |
(h) | A facility with an outstanding balance of $175.9 million as of June 30, 2020 has a fixed annual interest rate of 3.50%. All other facilities are variable rate with a weighted average rate of LIBOR + 1.78%. |
99
(i) |
|
|
(j) |
| The initial maximum facility size of |
(k) |
|
(l) |
|
(m) | Consists of: (i) |
|
|
|
|
|
90
As of SeptemberJune 30, 2017,2020, Wells Fargo Bank, N.A. is our largest repurchase facility creditor through twoa Commercial Loans repurchase facilities (Lender 1 Repo 1 facility and mortgage-backed securities (“MBS”) Repo 4 facility).a CMBS/RMBS repurchase facility with aggregate outstanding balances of $723.5 million and pledged asset carrying values of $1.2 billion. These facilities have a weighted average extended maturity of 8.6 years.
Refer to Note 9 of ourthe Condensed Consolidated Financial Statements for further disclosure regarding the terms of our secured financing arrangements.
Variance between Average and Quarter-End Credit Facility Borrowings Outstanding
The following table compares the average amount outstanding under our secured financing agreements during each quarter and the amount outstanding as of the end of each quarter, together with an explanation of significant variances (amounts in thousands):
| | | | | | | | | | | |
| | | | Weighted-Average | | | | | Explanations | ||
| | Quarter-End | | Balance During | | | | for Significant | |||
Quarter Ended |
| Balance |
| Quarter |
| Variance |
| Variances | |||
December 31, 2019 | | | 9,936,500 | | | 9,535,839 | | | 400,661 | | (a) |
March 31, 2020 | | | 10,714,680 | | | 10,194,276 | | | 520,404 | | (b) |
June 30, 2020 | | | 9,858,371 | | | 10,218,089 | | | (359,718) | | (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
|
| Explanations | ||
|
| Quarter-End |
| Balance During |
|
|
| for Significant | |||
Quarter Ended |
| Balance |
| Quarter |
| Variance |
| Variances | |||
December 31, 2016 |
|
| 4,197,218 |
|
| 4,073,485 |
|
| 123,733 |
| (a) |
March 31, 2017 |
|
| 4,456,347 |
|
| 4,154,497 |
|
| 301,850 |
| (b) |
June 30, 2017 |
|
| 4,788,996 |
|
| 4,591,428 |
|
| 197,568 |
| (c) |
September 30, 2017 |
|
| 5,555,720 |
|
| 5,020,575 |
|
| 535,145 |
| (d) |
(a) |
| Variance primarily due to the following: (i) |
(b) |
| Variance primarily due to the following: (i) |
(c) |
| Variance primarily due to the |
|
|
Borrowings under Unsecured Senior Notes
During both the three months ended SeptemberJune 30, 20172020 and 2016,2019, the weighted average effective borrowing rate on our unsecured senior notes was 5.6% and 5.7%, respectively.4.9%. During both the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, the weighted average effective borrowing rate on our unsecured senior notes was 5.6% and 5.7%, respectively.5.0%. The effective borrowing rate includes the effects of underwriter purchase discount and the adjustment for the conversion option on the convertible notes,Convertible Notes, the initial value of which reduced the balance of the notes.
Refer to Note 10 of our Condensed Consolidated Financial Statements for further disclosure regarding the terms of our unsecured senior notes.
91100
Scheduled Principal Repayments on Investments and Overhang on Financing Facilities
The following scheduled and/or projected principal repayments on our investments were based upon theon amounts outstanding and extended contractual termsmaturities of those investments as of June 30, 2020. The projected and/or required repayments of financing were based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the financing facilities in effectinvestments that have been pledged as of September 30, 2017collateral under the respective credit facility (amounts in thousands):
| | | | | | | | | | | | | |
|
| Scheduled Principal |
| Scheduled/Projected |
| Projected/Required |
| Scheduled Principal |
| ||||
| | Repayments on Loans | | Principal Repayments | | Repayments of | | Inflows Net of |
| ||||
| | and HTM Securities | | on RMBS and CMBS | | Financing | | Financing Outflows |
| ||||
Third Quarter 2020 |
| | 439,103 |
| | 22,746 |
| | (171,651) | | | 290,198 | |
Fourth Quarter 2020 |
| | 163,676 |
| | 113,085 |
| | (235,288) | (1) | | 41,473 | |
First Quarter 2021 | | | 191,084 | | | 8,230 | | | (1,267,529) | (2) | | (1,068,215) | |
Second Quarter 2021 | | | 424,304 | | | 9,707 | | | (21,514) | | | 412,497 | |
Total | | $ | 1,218,167 | | $ | 153,768 | | $ | (1,695,982) | | $ | (324,047) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Scheduled Principal |
| Scheduled/Projected |
| Projected/Required |
| Scheduled Principal |
| ||||
|
| Repayments on Loans |
| Principal Repayments |
| Repayments of |
| Inflows Net of |
| ||||
|
| and HTM Securities |
| on RMBS and CMBS |
| Financing |
| Financing Outflows |
| ||||
Fourth Quarter 2017 |
| $ | 1,140,742 |
| $ | 41,295 |
| $ | (1,207,607) |
| $ | (25,570) |
|
First Quarter 2018 |
|
| 379,506 |
|
| 26,500 |
|
| (731,374) |
|
| (325,368) |
|
Second Quarter 2018 |
|
| 340,371 |
|
| 48,904 |
|
| (241,849) |
|
| 147,426 |
|
Third Quarter 2018 |
|
| 681,058 |
|
| 35,277 |
|
| (275,477) |
|
| 440,858 |
|
Total |
| $ | 2,541,677 |
| $ | 151,976 |
| $ | (2,456,307) |
| $ | 237,346 |
|
(1) | $139.5 million represents borrowings with the FHLB associated with our residential loans, most of which are intended for securitization. The FHLB facility matures in February 2021. We intend to transition any loans not already securitized to alternate facilities beginning later this year. |
(2) | $500.0 million represents the maturity of our 2021 Senior Notes. $342.0 million represents borrowings with the FHLB associated with our residential loans (see Note 1 above). $157.9 million represents borrowings on our infrastructure repurchase facility which matures in February 2021. Subsequent to June 30, 2020, this facility was extended to February 2022. |
In the normal course of business, the Company is in discussions with its lenders to extend or amend any financing facilities which contain near term expirations.
Issuances of Equity Securities
We may raise funds through capital market transactions by issuing capital stock. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have authorized 100,000,000 shares of preferred stock and 500,000,000 shares of common stock. At SeptemberJune 30, 2017,2020, we had 100,000,000 shares of preferred stock available for issuance and 239,200,262215,532,478 shares of common stock available for issuance.
Other Potential Sources of Financing
In the future, we may also use other sources of financing to fund the acquisition of our target assets, including other secured as well as unsecured forms of borrowing and sale of certain investment securities which no longer meet our return requirements.senior loan interests and other assets.
Repurchases of Equity Securities and Convertible Senior Notes
In September 2014,February 2020, our board of directors authorized and announced the repurchase of up to $250.0$400.0 million of our outstanding common stockshares and convertible senior notes over a period of one year. Subsequent amendments to the repurchase program approved by our board of directors in December 2014, June 2015, January 2016 and February 2017 resulted in the program being (i) amended to increase maximum repurchases to $500.0 million, (ii) expanded to allow for the repurchase of our outstanding convertible senior notes under the program and (iii) extended through January 2019. Purchases made pursuant to the program arewill be made in either the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases are discretionary and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. During the ninesix months ended SeptemberJune 30, 2017,2020, we repurchased $230.0$28.8 million aggregate principal amount of our 2018 Notes for $250.7 million, however, this repurchase was not considered part of the repurchase program and therefore does not reduce our available capacity for future repurchases under the repurchase program. During the nine months ended September 30, 2017, we did not repurchase any common stock and no convertible senior notes under the repurchase program. As of SeptemberJune 30, 2017,2020, we have $262.2$371.2 million of remaining capacity to repurchase common stock and/or convertible senior notes under the repurchase program.
92101
Off-Balance Sheet Arrangements
We have relationships with unconsolidated entities and financial partnerships, such as entities often referred to as VIEs. Our maximum risk of loss associated with our involvement in VIEs is limited to the carrying value of our investment in the entity and any unfunded capital commitments. Refer to Note 14 of ourthe Condensed Consolidated Financial Statements for further discussion.
Dividends
We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We generally intend to continue to pay regular quarterly dividendsdistribute substantially all of our taxable income (which does not necessarily equal our GAAP net income) to our stockholders in an amount approximating our net taxable income,each year, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Refer to our Form 10-K for a detailed dividend history.
The Company’s board of directors declared the following dividends during the ninesix months ended SeptemberJune 30, 2017:2020:
|
|
|
|
|
|
|
|
|
|
Declare Date |
| Record Date |
| Payment Date |
| Amount |
| Frequency | |
8/9/17 |
| 9/29/17 |
| 10/13/17 |
| $ | 0.48 |
| Quarterly |
5/9/17 |
| 6/30/17 |
| 7/14/17 |
| $ | 0.48 |
| Quarterly |
2/23/17 |
| 3/31/17 |
| 4/14/17 |
| $ | 0.48 |
| Quarterly |
| | | | | | | | | |
Declare Date |
| Record Date |
| Payment Date |
| Amount |
| Frequency | |
6/16/20 | | 6/30/20 | | 7/15/20 | | $ | 0.48 | | Quarterly |
2/25/20 | | 3/31/20 | | 4/15/20 | | $ | 0.48 | | Quarterly |
On November 8, 2017, our board of directors declared a dividend of $0.48 per share for the fourth quarter of 2017, which is payable on January 15, 2018 to common stockholders of record as of December 29, 2017.
Leverage Policies
Our strategies with regards to use of leverage have not changed significantly since December 31, 2016.2019. Refer to our Form 10-K for a description of our strategies regarding use of leverage.
93102
Contractual Obligations and Commitments
Contractual obligations as of SeptemberJune 30, 20172020 are as follows (amounts in thousands):
| | | | | | | | | | | | | | | | |
|
| | |
| Less than |
| | |
| | |
| More than |
| ||
| | Total | | 1 year | | 1 to 3 years | | 3 to 5 years | | 5 years |
| |||||
Secured financings (a) | | $ | 8,921,996 | | $ | 1,039,604 | | $ | 825,752 | | $ | 4,188,245 | | $ | 2,868,395 | |
Collateralized loan obligations | | | 936,375 | | | — | | | — | | | — | | | 936,375 | |
Unsecured senior notes | |
| 1,950,000 | |
| 500,000 | |
| 950,000 | |
| 500,000 | |
| — | |
Loan and preferred equity interest funding commitments (b) | |
| 1,877,333 | |
| 1,244,077 | |
| 594,783 | |
| 38,473 | |
| — | |
Infrastructure Lending Segment commitments (c) | | | 272,742 | | | 224,555 | | | 48,187 | | | — | | | — | |
Future lease commitments | |
| 33,192 | |
| 6,945 | |
| 6,107 | |
| 3,491 | |
| 16,649 | |
Total | | $ | 13,991,638 | | $ | 3,015,181 | | $ | 2,424,829 | | $ | 4,730,209 | | $ | 3,821,419 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less than |
|
|
|
|
|
|
| More than |
| ||
|
| Total |
| 1 year |
| 1 to 3 years |
| 3 to 5 years |
| 5 years |
| |||||
Secured financings (a) |
| $ | 5,555,720 |
| $ | 434,166 |
| $ | 1,411,460 |
| $ | 1,312,237 |
| $ | 2,397,857 |
|
Unsecured senior notes |
|
| 2,073,229 |
|
| 781,866 |
|
| 341,363 |
|
| 700,000 |
|
| 250,000 |
|
Secured borrowings on transferred loans (b) |
|
| 75,000 |
|
| — |
|
| 75,000 |
|
| — |
|
| — |
|
Loan funding commitments (c) |
|
| 1,282,952 |
|
| 633,146 |
|
| 628,186 |
|
| 21,620 |
|
| — |
|
Future lease commitments |
|
| 28,895 |
|
| 6,425 |
|
| 11,726 |
|
| 4,236 |
|
| 6,508 |
|
Total |
| $ | 9,015,796 |
| $ | 1,855,603 |
| $ | 2,467,735 |
| $ | 2,038,093 |
| $ | 2,654,365 |
|
(a) |
| Represents the contractual maturity of the respective credit facility, inclusive of available extension options. If investments that have been pledged as collateral repay earlier than the contractual maturity of the debt, the related portion of the debt would likewise require earlier repayment. Refer to Note 9 to the Condensed Consolidated Financial Statements for the expected maturities by year. |
(b) |
|
|
| Excludes |
(c) | Represents contractual commitments of $139.8 million under revolvers and letters of credit and $132.9 million under delayed draw term loans. |
The table above does not include interest payable, amounts due under our management agreement, or amounts due under our derivative agreements or amounts due under guarantees as those contracts do not have fixed and determinable payments.
Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time. Refer to the section of our Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for a full discussion of our critical accounting estimates. OurExcept as set forth below, our critical accounting estimates have not materially changed since December 31, 2016.2019.
Credit Losses
Loans and Debt Securities Measured at Amortized Cost
As discussed in Note 2 to the Condensed Consolidated Financial Statements, ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our loans held-for-investment (“HFI”) and our held-to-maturity (“HTM”) debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities.
103
As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estateand infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. Such determination also incorporates significant assumptions and estimates regarding, among other things, prepayments, future fundings and economic forecasts. See Note 4 to the Condensed Consolidated Financial Statements for further discussion of our methodologies.
We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly. Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan or security. If a loan or security is considered to be credit deteriorated, we depart from the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.
Significant judgment is required when estimating future credit losses; therefore, actual results over time could be materially different. As of June 30, 2020, we held $10.7 billion of loans and HTM securities measured at amortized cost with expected future funding commitments of $2.0 billion. We recognized a provision for credit losses with respect to those loans and securities and expected future funding commitments of $10.2 million and $58.9 million during the three and six months ended June 30, 2020, respectively, and the related credit loss allowance was $127.5 million as of June 30, 2020.
Available-for-Sale Debt Securities
Separate provisions of ASC 326 apply to our available-for-sale (“AFS”) debt securities which are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (“AOCI”). We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis.
Subsequently, cumulative adverse changes in expected cash flows on our available-for-sale debt securities are recognized currently as an increase to the credit loss allowance. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.
Significant judgment is required when estimating expected cash flows used in determining the credit loss allowance for AFS debt securities; therefore, actual results over time could be materially different. As of June 30, 2020, we held $174.3 million of AFS debt securities. We did not recognize any provision for credit losses with respect to our AFS debt securities during the three and six months ended June 30, 2020 and there was no related credit loss allowance as of June 30, 2020.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake. Our strategies for managing risk and our exposure to such risks, as described in Item 7A of our Form 10-K, have not changed materially since December 31, 2016. Refer2019 except as described below. However, many of those risks have been magnified due to our Form 10-K, Item 7A for further discussion.the continuing economic disruptions caused by the COVID-19 pandemic.
Credit Risk
Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our Manager’s asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
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We seek to further manage credit risk associated with our Investing and Servicing Segment loans held-for-sale through the purchase of credit index instruments. The following table presents our credit index instruments as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
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|
|
|
|
|
|
|
|
|
|
| Face Value of |
| Aggregate Notional Value of |
| Number of |
| ||
|
| Loans Held-for-Sale |
| Credit Index Instruments |
| Credit Index Instruments |
| ||
September 30, 2017 |
| $ | 192,705 |
| $ | 59,000 |
| 10 |
|
December 31, 2016 |
| $ | 63,065 |
| $ | 14,000 |
| 4 |
|
| | | | | | | | | |
|
| Face Value of |
| Aggregate Notional Value of |
| Number of |
| ||
| | Loans Held-for-Sale | | Credit Index Instruments | | Credit Index Instruments |
| ||
June 30, 2020 | | $ | 191,229 | | $ | 69,000 |
| 4 | |
December 31, 2019 | | $ | 160,635 | | $ | 89,000 |
| 5 | |
ReferThe COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development and infrastructure projects currently planned or underway. These negative conditions have continued, and may continue into the future and impair our borrowers’ ability to Note 5pay principal and interest due to us under our loan agreements and our tenants’ ability to pay rent under various lease arrangements.
As discussed above, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. We 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 Condensed Consolidated Financial Statements for a discussionborrowers have indicated that due to the impact of weighted average ratingsthe 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.
Discussions we have had with our borrowers and tenants have addressed potential near-term defensive loan or lease modifications, which could include repurposing of reserves, temporary deferrals of interest, or performance test or covenant waivers on loans collateralized by assets directly impacted by the COVID-19 pandemic.
As discussed above, we have granted loan modifications to certain of our investment securities.borrowers. Although we continue to believe that the principal amounts of our assets are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments.
Capital Market Risk
We are exposed to risks related to the equity capital markets and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under repurchase obligations or other debt instruments. As a REIT, we are required to distribute a significant portion of our taxable income annually, which
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constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing and terms of capital we raise.
The COVID-19 pandemic has also resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets. We may receive margin calls from our lenders as a result of the decline in the market value of the loans or other assets pledged by us to our lenders under our repurchase agreements and warehouse credit facilities, and if we fail to resolve such margin calls when due by payment of cash or delivery of additional collateral, the lenders may exercise remedies including demanding payment by us of our aggregate outstanding financing obligations and/or taking ownership of the loans or other assets securing the applicable obligations.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match the interest rate characteristics of our investments with the interest rate characteristics of any related financing obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. In instances where the interest rate characteristics of an investment and the related financing obligation are not matched, we mitigate such interest rate risk through the utilization of interest rate derivatives of the same duration. The following table presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related interest rate derivatives as of SeptemberJune 30, 20172020 and December 31, 20162019 (dollars in thousands):
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| |||||||||
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| Aggregate Notional |
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| |||||||||||
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| Face Value of |
| Value of Interest |
| Number of Interest |
| |||||||||||
|
| Hedged Instruments |
| Rate Derivatives |
| Rate Derivatives |
| |||||||||||
Instrument hedged as of September 30, 2017 |
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| | | | | | | | | | |||||||||
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| |
| Aggregate Notional |
| |
| |||||||||||
| | Face Value of | | Value of Interest | | Number of Interest |
| |||||||||||
| | Hedged Instruments | | Rate Derivatives | | Rate Derivatives |
| |||||||||||
Instrument hedged as of June 30, 2020 | | | | | | | | | | |||||||||
Loans held-for-investment, residential | | $ | 260,542 | | $ | 87,800 |
| 3 | | |||||||||
Loans held-for-sale |
| $ | 192,705 |
| $ | 163,490 |
| 24 |
| | | 621,195 | | | 672,900 |
| 33 | |
RMBS, available-for-sale |
|
| 379,432 |
|
| 69,000 |
| 2 |
| |
| 266,539 | |
| 421,000 |
| 4 | |
CMBS, fair value option | | | 152,217 | | | 71,000 | | 2 | | |||||||||
HTM debt securities | | | 17,573 | | | 17,573 | | 1 | | |||||||||
Secured financing agreements |
|
| 1,051,497 |
|
| 1,038,859 |
| 18 |
| |
| 920,891 | | | 1,640,311 |
| 25 | |
|
| $ | 1,623,634 |
| $ | 1,271,349 |
| 44 |
| |||||||||
Instrument hedged as of December 31, 2016 |
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| |||||||||
Loans held-for-investment |
| $ | 8,000 |
| $ | 8,000 |
| 1 |
| |||||||||
Unsecured senior notes | |
| 1,000,000 | | | 970,000 |
| 2 | | |||||||||
| | $ | 3,238,958 | | $ | 3,880,584 |
| 70 | | |||||||||
Instrument hedged as of December 31, 2019 | | | | | | | | | | |||||||||
Loans held-for-investment, residential | | $ | 654,925 | | $ | 169,200 |
| 8 | | |||||||||
Loans held-for-sale |
|
| 63,065 |
|
| 50,900 |
| 18 |
| | | 747,779 | | | 344,900 |
| 24 | |
RMBS, available-for-sale |
|
| 399,883 |
|
| 69,000 |
| 2 |
| |
| 278,853 | |
| 85,000 |
| 2 | |
HTM debt securities | | | 18,784 | | | 18,784 | | 1 | | |||||||||
Secured financing agreements |
|
| 1,011,067 |
|
| 1,003,064 |
| 18 |
| |
| 693,496 | | | 1,423,881 |
| 14 | |
|
| $ | 1,482,015 |
| $ | 1,130,964 |
| 39 |
| |||||||||
Unsecured senior notes | |
| 1,000,000 | | | 970,000 |
| 2 | | |||||||||
| | $ | 3,393,837 | | $ | 3,011,765 |
| 51 | |
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The following table summarizes the estimated annual change in net investment income for our LIBOR-basedvariable rate investments and our LIBOR-basedvariable rate debt assuming increases or decreases in LIBOR or other applicable index rates and adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share data):
| | | | | | | | | | | | | | | |
|
| Variable rate |
| | |
| | |
| | |
| | | |
| | investments and | | 1.0% | | 0.5% | | 0.5% | | 1.0% | |||||
Income (Expense) Subject to Interest Rate Sensitivity | | indebtedness (1) | | Increase | | Increase | | Decrease | | Decrease | |||||
Investment income from variable rate investments | | $ | 10,151,307 | | $ | 37,508 | | $ | 15,215 | | $ | (6,023) | | $ | (8,225) |
Interest expense from variable rate debt, net of interest rate derivatives | |
| (6,196,744) | |
| (68,632) | |
| (34,013) | |
| 10,980 | |
| 11,451 |
Net investment income from variable rate instruments | | $ | 3,954,563 | | $ | (31,124) | | $ | (18,798) | | $ | 4,957 | | $ | 3,226 |
Impact per diluted shares outstanding | | | | | $ | (0.11) | | $ | (0.07) | | $ | 0.02 | | $ | 0.01 |
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| Variable-rate |
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|
|
|
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| |
|
| investments and |
| 3.0% |
| 2.0% |
| 1.0% |
| 1.0% | |||||
Income (Expense) Subject to Interest Rate Sensitivity |
| indebtedness (1) |
| Increase |
| Increase |
| Increase |
| Decrease (2) | |||||
Investment income from variable-rate investments |
| $ | 6,341,167 |
| $ | 184,401 |
| $ | 122,181 |
| $ | 59,962 |
| $ | (41,292) |
Interest expense from variable-rate debt, net of interest rate derivatives |
|
| (3,515,498) |
|
| (112,112) |
|
| (76,615) |
|
| (39,534) |
|
| 39,504 |
Net investment income from variable rate instruments |
| $ | 2,825,669 |
| $ | 72,289 |
| $ | 45,566 |
| $ | 20,428 |
| $ | (1,788) |
Impact per diluted shares outstanding |
|
|
|
| $ | 0.27 |
| $ | 0.17 |
| $ | 0.08 |
| $ | (0.01) |
| (1)Includes the notional value of interest rate derivatives. |
|
|
LIBOR Transition Risk
In July 2017, the United Kingdom’s Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. There is currently no certainty regarding the future utilization of LIBOR or of any particular replacement rate (although the secured overnight financing rate has been proposed as an alternative to U.S.-dollar LIBOR). As indicated in the Interest Rate Risk section above, a substantial portion of our loans, investment securities, borrowings and interest rate derivatives are indexed to LIBOR or similar reference rates. Market participants anticipate that financial instruments tied to LIBOR will require transition to an alternative reference rate if LIBOR is no longer available. Our LIBOR-based loan agreements and borrowing arrangements generally specify alternative reference rates such as the prime rate and federal funds rate, respectively. The potential effect of the discontinuation of LIBOR on our interest income and expense cannot yet be determined and any changes to benchmark interest rates could increase our financing costs and/or result in mismatches between the interest rates of our investments and the corresponding financings.
Foreign Currency Risk
We intend to hedge our currency exposures in a prudent manner. However, our currency hedging strategies may not eliminate all of our currency risk due to, among other things, uncertainties in the timing and/or amount of payments received on the related investments, and/or unequal, inaccurate, or unavailable hedges to perfectly offset changes in future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges for the benefit of the hedge counterparty, which could adversely affect our liquidity.
Consistent with our strategy of hedging foreign currency exposure on certain investments, we typically enter into a series of forwards to fix the U.S. dollar amount of foreign currency denominated cash flows (interest income, rental income and principal payments) we expect to receive from our foreign currency denominated investments. Accordingly, the notional values and expiration dates of our foreign currency hedges approximate the amounts and timing of future payments we expect to receive on the related investments.
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The following table represents our current currency hedge exposure as it relates to our investments denominated in foreign currencies, along with the aggregate notional amount of the hedges in place (amounts in thousands except for number of contracts,contracts) using the SeptemberJune 30, 20172020 GBP closing rate of 1.3396 and Euro (“EUR”)1.2399, EUR closing rate of 1.1816):1.1235 and AUD closing rate of 0.6902.
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|
Carrying Value of Net Investment |
| Local Currency |
| Number of |
| Aggregate Notional Value of Hedges Applied |
| Expiration Range of Contracts | ||
$ | 220,657 |
| GBP |
| 34 |
| $ | 227,339 |
| January 2018 – February 2018 |
| 37,324 |
| GBP |
| 73 |
|
| 40,750 |
| October 2017 – June 2019 |
| 30,133 |
| EUR |
| 5 |
|
| 35,901 |
| December 2017 – December 2018 |
| 1,115 |
| EUR |
| 1 |
|
| 1,992 |
| April 2018 |
| 20,145 |
| EUR |
| 5 |
|
| 23,922 |
| November 2017 – November 2018 |
| 52,237 |
| GBP |
| 13 |
|
| 70,591 |
| November 2017 – July 2020 |
| 695 |
| GBP |
| 1 |
|
| 1,206 |
| March 2018 |
| 146,773 |
| EUR |
| 33 | (1) |
| 273,048 |
| December 2017 – June 2020 |
| 13,530 |
| GBP |
| 8 |
|
| 13,667 |
| October 2017 – April 2019 |
$ | 522,609 |
|
|
| 173 |
| $ | 688,416 |
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|
| | | | | | | | | | |
Carrying Value of Net Investment | | Local Currency | | Number of | | Aggregate Notional Value of Hedges Applied | | Expiration Range of Contracts | ||
$ | 48,803 | | AUD | | 9 | | $ | 55,167 | | November 2021 |
| 17,564 | | GBP | | 10 | | | 27,960 | | July 2020 – December 2023 |
| 19,088 | | EUR | | 132 | | | 18,231 | | August 2020 – July 2021 |
| 28,521 | | GBP | | 1 | | | 35,257 | | July 2023 |
| 72,432 | | GBP | | 23 | | | 78,762 | | July 2020 – January 2022 |
| 48,568 | | EUR | | 27 | | | 52,437 | | August 2020 – July 2022 |
| 25,916 | | EUR | | 45 | | | 30,317 | | August 2020 – August 2022 |
| 89,547 | | GBP | | 8 | | | 98,871 | | July 2020 – January 2022 |
| 65,914 | | GBP | | 15 | | | 57,651 | | April 2021 |
| 5,531 | | EUR | | 8 | | | 6,892 | | November 2020 – July 2022 |
| 11,179 | | GBP | | 8 | | | 13,899 | | November 2020 – July 2022 |
| 1,917 | | AUD | | 1 | | | 3,908 | | August 2021 |
| 23,641 | | EUR | | 26 | | | 30,706 | | August 2020 – June 2023 |
| 38,312 | | EUR | | 12 | | | 59,539 | | August 2020 – November 2022 |
| 39,122 | | EUR | | 22 | | | 48,987 | | September 2020 – November 2025 |
| 55,131 | | GBP | | 24 | | | 66,056 | | August 2020 – November 2021 |
| 8,605 | | EUR | | 6 | | | 11,207 | | June 2022 |
| 9,791 | | GBP | | 8 | | | 12,622 | | September 2020 – April 2022 |
$ | 609,582 | | | | 385 | | $ | 708,469 | | |
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, the impacts of the COVID-19 pandemic discussed above, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.
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Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting. No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended SeptemberJune 30, 20172020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATIONINFORMATION
Currently, no material legal proceedings are pending or, to our knowledge, threatened or contemplated against us, that could have a material adverse effect on our business, financial position or results of operations.
Except as set forth in our Quarterly Report on Form 10-Q for the period ended March 31, 2020, as updated below, there have been no material changes to the risk factors previously disclosed in theour Form 10-K.
Risks Related to SourcesOur Company
The global COVID-19 pandemic is having, and will likely continue to have, an adverse impact on our operations and financial performance, as well as on the operations and financial performance of Financingmany of the borrowers underlying our real estate-related assets and tenants of our owned properties. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely impact our business, financial condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders.
AmendmentsOur operations and financial performance have been negatively impacted by the COVID-19 pandemic that has caused, and is expected to continue to cause, the global slowdown of economic activity and significant volatility and disruption of financial markets. 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 business, financial condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders, remains uncertain and difficult to predict. Further, the ultimate impact of the COVID-19 pandemic 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 depends on many factors that are not within our control, including, but not limited, to: governmental, business and individuals’ actions that have been and continue to be taken in response to the Federal Home Loan Bank (“FHLB”) membership regulationspandemic (including quarantine and “stay-at-home” orders, restrictions on travel and transport, school closures, limits on the operations of non-essential businesses and other workforce pressures); the impact of the pandemic, and actions taken in response thereto, on global and regional economies and economic activity, including concerns regarding additional surges of the pandemic or the expansion of the economic impact thereof as a result of certain jurisdictions “re-opening” or otherwise lifting certain restrictions prematurely; the availability of U.S. federal, state, local or non-U.S. funding programs aimed at supporting the economy during the COVID 19-pandemic, including uncertainties regarding the potential implementation of new or extended programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery when the COVID-19 pandemic subsides.
The COVID-19 pandemic and “stay-at-home” and other measures implemented to prevent its spread and any extended period of economic slowdown or recession could have a material adverse effect 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, among other matters. We expect that these adverse effects are likely to continue as long as the outbreak persists and potentially even longer. Although it is difficult to predict the magnitude of the business and economic implications, the COVID-19 outbreak could affect us in various ways, including, among other factors:
● | the decline in the value of commercial and residential real estate, which negatively impacts the value of our investments, potentially materially. |
● | the negative impact on the financial stability of borrowers underlying our real estate-related assets and infrastructure loans, which is expected to increase significantly the number of borrowers who become delinquent or default on their loans, or who seek to defer payment on, or refinance, their loans. Assets relating to certain property types are more likely to experience particular stress as a result of the impact of COVID-19, including in particular assets secured by hotel, multifamily and retail properties. The borrowers underlying these assets, and the tenants at such properties, are facing operational and financial hardships resulting from the |
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spread of COVID-19 and related governmental measures. For example, certain of the hotel and retail properties securing our assets were or continue to be required to temporarily close or limit their operations significantly as a result of COVID-19 and related governmental measures, which has had a material adverse effect on the businesses of the applicable borrowers. If the disruptions caused by the COVID-19 pandemic continue and the restrictions put in place are not lifted, the businesses of such borrowers, and the tenants at such properties, could continue to suffer materially or such borrowers and tenants could become insolvent. |
We have been engaged in discussions with our borrowers, some of whom have indicated that, due to the impact of the COVID-19 pandemic, they have been unable to timely execute their business plans, have had to temporarily close their businesses or have experienced other negative business consequences and have requested or indicated that they will be requesting interest or principal deferral or other modifications of their loans. We therefore anticipate more frequent modifications of our loans and potentially instances of default or foreclosure on assets underlying our loans.
To the extent that borrowers that have been negatively impacted by the COVID-19 pandemic do not timely remit payments of principal and interest relating to their respective real estate-related assets, the value of such assets will likely be impaired, potentially materially. Failure to receive interest when due may adversely affect our liquidity and therefore our ability to fund our operations or address maturing liabilities on a timely basis.
● | we may receive margin calls from our lenders as a result of the decline in the market value of the loans or other assets pledged by us to our lenders under our repurchase agreements and warehouse credit facilities, and if we fail to resolve such margin calls when due by payment of cash or delivery of additional collateral, the lenders may exercise remedies including demanding payment by us of our aggregate outstanding financing obligations and/or taking ownership of the loans or other assets securing the applicable obligations. We may not have the funds available to repay such financing obligations, and we may be unable to raise the funds from alternative sources on favorable terms or at all. Forced sales of the loans or other assets that secure our financing obligations in order to pay outstanding financing obligations may be on terms less favorable to us than might otherwise be available in a regularly functioning market and could result in deficiency judgments and other claims against us. |
● | the adverse effect on the financial stability of the tenants in the retail and multifamily properties that we own, which is expected to negatively impact the ability of such tenants to make their rental payments to us on a timely basis or at all. To the extent the number of tenants who are unable to make timely rental payments to us increases significantly, the value of these property investments will likely be impaired, potentially materially. In addition, as a result of the foregoing, these properties may not generate sufficient funds to pay principal and interest on the mortgage loans secured by such properties or may otherwise fail to satisfy financial covenants applicable under the terms of such loans. In this regard, we may enter into agreements with certain of our tenants to allow, among other items, for a deferral of some portion of the rent owed to us for an agreed-upon period of time. Failure to receive rent when due may adversely affect our liquidity and therefore our ability to fund our operations or address maturing liabilities on a timely basis. |
● | if we fail to meet or satisfy any of the covenants in our repurchase agreements, warehouse credit facilities or other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. |
● | as a result of the decline in the market value of the loans in our collateralized loan obligation (the “CLO”), we may not meet certain interest coverage tests, overcollateralization coverage tests or other tests that could result in a change in the priority of distributions, which could result in the reduction or elimination of distributions to the subordinate debt and equity tranches we own until the tests have been met or certain senior classes of securities have been paid in full. Accordingly, we may experience a reduction in our cash flow from those interests which may adversely affect our liquidity and therefore our ability to fund our operations or address maturing liabilities on a timely basis. |
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● | difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which may adversely affect our access to capital necessary to fund our operations or address maturing liabilities on a timely basis, as well as the ability of borrowers underlying our real estate-related assets and infrastructure loans, or of tenants of the properties we own, to meet their obligations to us. |
The adverse impact of the COVID-19 pandemic could adversely affect us.
In July 2017, we acquired a captive insurance company that is a memberour liquidity position and could limit our ability to grow our business and fully execute our business strategy. 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 FHLBfollowing actions: raise capital from offerings of Chicago (the “FHLBC”). Our subsidiary’s membershipsecurities, borrow additional capital, sell assets, pay our management and incentive fees in shares of our common stock (as was done for the quarter ended March 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.
● | uncertainties created by the COVID-19 pandemic may make it difficult to estimate provisions for loan losses. |
● | a general decline in business activity and demand for mortgage financing, servicing and other real estate and real estate-related transactions, which could adversely affect our ability to source attractive investments or to redeploy the proceeds from repayments of our existing investments. |
● | temporary, prolonged or permanent changes involving our investment activities; to the extent we elect or are required to limit or be more selective in making investments, we may strain our relationships or reputation with borrowers, business partners and counterparties, breach actual or perceived obligations to them, or be subject to litigation and claims from such borrowers, business partners and counterparties. |
● | prolonged closures of, or other operational issues at, properties that secure our investments, or properties that we own. |
● | the long-term impact on the market for office properties in the event a significant number of businesses determine to continue to utilize large-scale work-from-home policies as the COVID-19 pandemic continues and thereafter. |
● | government-mandated moratoriums on the construction, development or redevelopment of properties underlying our construction or rehabilitation loans, or with respect to infrastructure projects, may prevent the completion, on a timely basis or at all, of such projects. The repayment of construction or rehabilitation loans often depends on the borrower’s ability to secure permanent “take-out” financing, which requires the successful completion of construction and stabilization of the project, or operation of the property with an income stream sufficient to meet operating expenses. Similarly, because the loan structure for project finance relies primarily on the underlying project’s cash flows for repayment, the ability of the project company to repay a project finance loan is dependent upon the successful development, construction and/or operation of such project rather than upon the existence of independent income or assets of the project company. Accordingly, if a project cannot be completed on a timely basis or at all as a result of the COVID-19 pandemic and related governmental measures, the ability to repay the applicable loan will likely be impaired. In addition, certain of such projects may rely on tax credits which may be available only if construction is completed by certain deadlines, which may not be met because of such moratoriums. |
To the extent the COVID-19 pandemic adversely affects our business, financial condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders, it may also have the effect of heightening many of the other risks described in the FHLBC provides us with access to attractive long-term collateralized financing for residential mortgage loans. As of September 30, 2017, our subsidiary had $250.0 million of borrowings from the FHLBC to finance its portfolio of residential mortgage loans. In January 2016, the Federal Housing Finance Agency (“FHFA”) amended its regulations governing FHLB membership, providing that captive insurance companies will no longer be eligible for membership in the FHLB system. Our subsidiary was admitted as a member of the FHLBC prior to September 2014 and, as a result, is eligibleForm 10-K under the amended regulations to remain a member through February 2021. There can be no assurance that, following the terminationheading “Risk Factors.”
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no unregistered sales of securities during the three months ended SeptemberJune 30, 2017.2020.
Issuer Purchases of Equity Securities
There were no purchases of common stock during the three months ended SeptemberJune 30, 2017.2020.
None.
Not applicable.
None.
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(a) | Index to Exhibits |
(a)Index to Exhibits
| ||
Exhibit No. | | Description |
31.1 | | Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 |
| | |
32.1 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
32.2 | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | |
101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
| STARWOOD PROPERTY TRUST, INC. | |
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Date: | By: | /s/ BARRY S. STERNLICHT |
| | Barry S. Sternlicht |
| | |
Date: | By: | /s/ RINA PANIRY |
| | Rina Paniry |
100115