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STARWOOD PROPERTY TRUST, INC. - Quarter Report: 2017 June (Form 10-Q)

Table of Contents 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

 

OR

 

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

 

Commission file number 001-34436

 


 

Starwood Property Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Maryland

 

27-0247747

(State or Other Jurisdiction of
Incorporation or Organization)

 

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

 

 

 

591 West Putnam Avenue

 

 

Greenwich, Connecticut

 

06830

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(203) 422-7700


 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐

(Do not check if a 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 August 3, 2017 was 260,558,434.

 

 

 

 

 


 

Table of Contents 

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, 2016, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 and this Quarterly Report on Form 10-Q, including those set forth under the captions “Risk Factors” and “Business”

 

·

defaults by borrowers in paying debt service on outstanding indebtedness;

 

·

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

 

·

availability of mortgage origination and acquisition opportunities acceptable to us;

 

·

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

 

·

national and local economic and business conditions;

 

·

general and local commercial and residential real estate property conditions;

 

·

changes in federal government policies;

 

·

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

 

·

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

 

·

changes in interest rates; and

 

·

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

 

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

2


 

Table of Contents 

 

TABLE OF CONTENTS

 

 

 

 

 

 

Page

Part I 

Financial Information

 

Item 1. 

Financial Statements

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income

6

 

Condensed Consolidated Statements of Equity

7

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

10

 

Note 1 Business and Organization

10

 

Note 2 Summary of Significant Accounting Policies

11

 

Note 3 Acquisitions and Dispositions

17

 

Note 4 Loans

19

 

Note 5 Investment Securities

24

 

Note 6 Properties

28

 

Note 7 Investment in Unconsolidated Entities

29

 

Note 8 Goodwill and Intangibles

29

 

Note 9 Secured Financing Agreements

31

 

Note 10 Unsecured Senior Notes

34

 

Note 11 Loan Securitization/Sale Activities

36

 

Note 12 Derivatives and Hedging Activity

37

 

Note 13 Offsetting Assets and Liabilities

39

 

Note 14 Variable Interest Entities

40

 

Note 15 Related-Party Transactions

41

 

Note 16 Stockholders’ Equity

43

 

Note 17 Earnings per Share

44

 

Note 18 Accumulated Other Comprehensive Income

45

 

Note 19 Fair Value

46

 

Note 20 Income Taxes

51

 

Note 21 Commitments and Contingencies

51

 

Note 22 Segment Data

52

 

Note 23 Subsequent Events

59

Item 2. 

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

60

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

87

Item 4. 

Controls and Procedures

89

Part II 

Other Information

 

Item 1. 

Legal Proceedings

90

Item 1A. 

Risk Factors

90

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

90

Item 3. 

Defaults Upon Senior Securities

90

Item 4. 

Mine Safety Disclosures

90

Item 5. 

Other Information

90

Item 6. 

Exhibits

92

 

 

 

3


 

Table of Contents 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

(Unaudited, amounts in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

As of

 

As of

 

    

June 30, 2017

    

December 31, 2016

Assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

261,894

 

$

615,522

Restricted cash

 

 

43,299

 

 

35,233

Loans held-for-investment, net

 

 

6,211,075

 

 

5,847,995

Loans held-for-sale, at fair value

 

 

610,116

 

 

63,279

Loans transferred as secured borrowings

 

 

 —

 

 

35,000

Investment securities ($283,132 and $297,638 held at fair value)

 

 

748,934

 

 

807,618

Properties, net

 

 

1,960,498

 

 

1,944,720

Intangible assets ($38,648 and $55,082 held at fair value)

 

 

191,366

 

 

219,248

Investment in unconsolidated entities

 

 

229,539

 

 

204,605

Goodwill

 

 

140,437

 

 

140,437

Derivative assets

 

 

46,078

 

 

89,361

Accrued interest receivable

 

 

33,346

 

 

28,224

Other assets

 

 

163,648

 

 

101,763

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

 

 

53,902,715

 

 

67,123,261

Total Assets 

 

$

64,542,945

 

$

77,256,266

Liabilities and Equity

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

171,449

 

$

198,134

Related-party payable

 

 

22,778

 

 

37,818

Dividends payable

 

 

126,171

 

 

125,075

Derivative liabilities

 

 

8,051

 

 

3,904

Secured financing agreements, net

 

 

4,750,923

 

 

4,154,126

Unsecured senior notes, net

 

 

2,039,086

 

 

2,011,544

Secured borrowings on transferred loans

 

 

 —

 

 

35,000

VIE liabilities, at fair value

 

 

52,864,038

 

 

66,130,592

Total Liabilities 

 

 

59,982,496

 

 

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, 265,161,169 issued and 260,554,284 outstanding as of June 30, 2017 and 263,893,806 issued and 259,286,921 outstanding as of December 31, 2016

 

 

2,652

 

 

2,639

Additional paid-in capital

 

 

4,697,497

 

 

4,691,180

Treasury stock (4,606,885 shares)

 

 

(92,104)

 

 

(92,104)

Accumulated other comprehensive income

 

 

55,981

 

 

36,138

Accumulated deficit

 

 

(146,863)

 

 

(115,579)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,517,163

 

 

4,522,274

Non-controlling interests in consolidated subsidiaries

 

 

43,286

 

 

37,799

Total Equity 

 

 

4,560,449

 

 

4,560,073

Total Liabilities and Equity 

 

$

64,542,945

 

$

77,256,266

 

See notes to condensed consolidated financial statements.

4


 

Table of Contents 

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,

 

    

2017

    

2016

    

2017

    

2016

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

 

$

120,612

 

$

122,557

 

$

232,495

 

$

240,089

Interest income from investment securities

 

 

12,370

 

 

15,301

 

 

27,594

 

 

34,704

Servicing fees

 

 

18,628

 

 

23,312

 

 

32,730

 

 

48,003

Rental income

 

 

58,966

 

 

37,843

 

 

116,008

 

 

70,520

Other revenues

 

 

993

 

 

979

 

 

1,462

 

 

2,169

Total revenues 

 

 

211,569

 

 

199,992

 

 

410,289

 

 

395,485

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

24,633

 

 

23,767

 

 

49,017

 

 

48,730

Interest expense

 

 

71,317

 

 

57,635

 

 

137,177

 

 

114,155

General and administrative

 

 

32,520

 

 

35,409

 

 

62,949

 

 

68,207

Acquisition and investment pursuit costs

 

 

537

 

 

2,888

 

 

1,208

 

 

4,173

Costs of rental operations

 

 

23,024

 

 

15,852

 

 

43,902

 

 

28,507

Depreciation and amortization

 

 

22,032

 

 

19,073

 

 

44,260

 

 

37,833

Loan loss allowance, net

 

 

(2,694)

 

 

2,029

 

 

(2,999)

 

 

1,268

Other expense

 

 

142

 

 

 —

 

 

900

 

 

100

Total costs and expenses 

 

 

171,511

 

 

156,653

 

 

336,414

 

 

302,973

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

 

 

40,058

 

 

43,339

 

 

73,875

 

 

92,512

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

77,761

 

 

50,707

 

 

146,931

 

 

46,540

Change in fair value of servicing rights

 

 

(8,001)

 

 

(12,191)

 

 

(16,434)

 

 

(18,930)

Change in fair value of investment securities, net

 

 

(2,493)

 

 

1,319

 

 

(3,664)

 

 

2,072

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

 

 

15,406

 

 

13,235

 

 

25,999

 

 

20,126

Earnings from unconsolidated entities

 

 

29,465

 

 

4,479

 

 

32,452

 

 

8,544

Gain (loss) on sale of investments and other assets, net

 

 

5,183

 

 

(90)

 

 

5,127

 

 

155

(Loss) gain on derivative financial instruments, net

 

 

(37,586)

 

 

20,253

 

 

(41,935)

 

 

(4,465)

Foreign currency gain (loss), net

 

 

12,910

 

 

(16,988)

 

 

17,774

 

 

(17,366)

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

 

 

(109)

 

 

 —

 

 

(109)

 

 

(54)

Noncredit portion of OTTI recognized in other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

54

Net impairment losses recognized in earnings

 

 

(109)

 

 

 —

 

 

(109)

 

 

 —

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

(5,916)

 

 

 —

Other income, net

 

 

91

 

 

8,714

 

 

456

 

 

10,729

Total other income (loss)

 

 

92,627

 

 

69,438

 

 

160,681

 

 

47,405

Income before income taxes

 

 

132,685

 

 

112,777

 

 

234,556

 

 

139,917

Income tax provision

 

 

(9,452)

 

 

(706)

 

 

(8,469)

 

 

(800)

Net income 

 

 

123,233

 

 

112,071

 

 

226,087

 

 

139,117

Net income attributable to non-controlling interests

 

 

(5,853)

 

 

(598)

 

 

(6,349)

 

 

(987)

Net income attributable to Starwood Property Trust, Inc.  

 

$

117,380

 

$

111,473

 

$

219,738

 

$

138,130

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.47

 

$

0.84

 

$

0.58

Diluted

 

$

0.44

 

$

0.47

 

$

0.83

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.48

 

$

0.48

 

$

0.96

 

$

0.96

 

See notes to condensed consolidated financial statements.

 

 

5


 

Table of Contents 

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

    

For the Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

 

2016

 

2017

 

2016

Net income 

 

$

123,233

 

$

112,071

 

$

226,087

 

$

139,117

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

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 2

 

 

(48)

 

 

78

 

 

(321)

Available-for-sale securities

 

 

4,907

 

 

5,951

 

 

6,753

 

 

2,551

Foreign currency translation

 

 

11,005

 

 

(6,733)

 

 

13,012

 

 

668

Other comprehensive income (loss)

 

 

15,914

 

 

(830)

 

 

19,843

 

 

2,898

Comprehensive income 

 

 

139,147

 

 

111,241

 

 

245,930

 

 

142,015

Less: Comprehensive income attributable to non-controlling interests

 

 

(5,853)

 

 

(598)

 

 

(6,349)

 

 

(987)

Comprehensive income attributable to Starwood Property Trust, Inc.  

 

$

133,294

 

$

110,643

 

$

239,581

 

$

141,028

 

See notes to condensed consolidated financial statements.

 

 

6


 

Table of Contents 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Equity

(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

 

16,407

 

 

 —

 

 

369

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

369

 

 

 —

 

 

369

 

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

 

709,462

 

 

 7

 

 

8,072

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,079

 

 

 —

 

 

8,079

 

Manager incentive fee paid in stock

 

541,494

 

 

 6

 

 

12,238

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,244

 

 

 —

 

 

12,244

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

219,738

 

 

 —

 

 

219,738

 

 

6,349

 

 

226,087

 

Dividends declared, $0.96 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(251,022)

 

 

 —

 

 

(251,022)

 

 

 —

 

 

(251,022)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

19,843

 

 

19,843

 

 

 —

 

 

19,843

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,737

 

 

2,737

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(3,599)

 

 

(3,599)

 

Balance, June 30, 2017

 

265,161,169

 

$

2,652

 

$

4,697,497

 

4,606,885

 

$

(92,104)

 

$

(146,863)

 

$

55,981

 

$

4,517,163

 

$

43,286

 

$

4,560,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

9,163

 

 

 —

 

 

177

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

177

 

 

 —

 

 

177

 

Common stock repurchased

 

 —

 

 

 —

 

 

 —

 

1,052,889

 

 

(19,723)

 

 

 —

 

 

 —

 

 

(19,723)

 

 

 —

 

 

(19,723)

 

Share-based compensation

 

876,674

 

 

 9

 

 

14,651

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,660

 

 

 —

 

 

14,660

 

Manager incentive fee paid in stock

 

723,249

 

 

 8

 

 

13,215

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

13,223

 

 

 —

 

 

13,223

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

138,130

 

 

 —

 

 

138,130

 

 

987

 

 

139,117

 

Dividends declared, $0.96 per share

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(229,217)

 

 

 —

 

 

(229,217)

 

 

 —

 

 

(229,217)

 

Other comprehensive income, net

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

2,898

 

 

2,898

 

 

 —

 

 

2,898

 

VIE non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(52)

 

 

(52)

 

Contributions from non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,417

 

 

10,417

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,350)

 

 

(2,350)

 

Balance, June 30, 2016

 

242,653,861

 

$

2,427

 

$

4,220,887

 

4,606,885

 

$

(92,104)

 

$

(103,373)

 

$

32,627

 

$

4,060,464

 

$

39,629

 

$

4,100,093

 

 

See notes to condensed consolidated financial statements.

 

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Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 30,

 

    

2017

    

2016

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net income

 

$

226,087

 

$

139,117

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

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

 

 

9,324

 

 

8,212

Amortization of discounts and deferred financing costs on senior notes

 

 

11,777

 

 

10,628

Accretion of net discount on investment securities

 

 

(8,007)

 

 

(7,349)

Accretion of net deferred loan fees and discounts

 

 

(16,194)

 

 

(23,362)

Share-based compensation

 

 

8,079

 

 

14,660

Share-based component of incentive fees

 

 

12,244

 

 

13,223

Change in fair value of fair value option investment securities

 

 

3,664

 

 

(2,072)

Change in fair value of consolidated VIEs

 

 

(42,593)

 

 

45,899

Change in fair value of servicing rights

 

 

16,434

 

 

18,930

Change in fair value of loans held-for-sale

 

 

(25,999)

 

 

(20,126)

Change in fair value of derivatives

 

 

39,223

 

 

2,332

Foreign currency (gain) loss, net

 

 

(17,590)

 

 

17,169

Gain on sale of investments and other assets

 

 

(5,127)

 

 

(155)

Impairment charges

 

 

867

 

 

 —

Loan loss allowance, net

 

 

(2,999)

 

 

1,268

Depreciation and amortization

 

 

42,701

 

 

34,664

Earnings from unconsolidated entities

 

 

(32,452)

 

 

(8,544)

Distributions of earnings from unconsolidated entities

 

 

4,284

 

 

9,817

Bargain purchase gain

 

 

 —

 

 

(8,406)

Loss on extinguishment of debt

 

 

5,916

 

 

 —

Origination and purchase of loans held-for-sale, net of principal collections

 

 

(991,343)

 

 

(488,448)

Proceeds from sale of loans held-for-sale

 

 

470,478

 

 

475,333

Changes in operating assets and liabilities:

 

 

 

 

 

 

Related-party payable, net

 

 

(15,040)

 

 

(20,749)

Accrued and capitalized interest receivable, less purchased interest

 

 

(39,143)

 

 

(41,151)

Other assets

 

 

(2,391)

 

 

6,715

Accounts payable, accrued expenses and other liabilities

 

 

2,763

 

 

(29,055)

Net cash (used in) provided by operating activities

 

 

(345,037)

 

 

148,550

Cash Flows from Investing Activities:

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(1,228,952)

 

 

(997,421)

Proceeds from principal collections on loans

 

 

869,297

 

 

1,193,643

Proceeds from loans sold

 

 

37,079

 

 

121,276

Purchase of investment securities

 

 

(7,433)

 

 

(350,642)

Proceeds from sales of investment securities

 

 

11,134

 

 

1,269

Proceeds from principal collections on investment securities

 

 

86,259

 

 

47,544

Real estate business combinations, net of cash acquired

 

 

 —

 

 

(91,186)

Proceeds from sale of properties

 

 

18,256

 

 

 —

Additions to properties and other assets

 

 

(25,503)

 

 

(5,521)

Investment in unconsolidated entities

 

 

 —

 

 

(3,854)

Distribution of capital from unconsolidated entities

 

 

3,235

 

 

1,244

Payments for purchase or termination of derivatives

 

 

(39,755)

 

 

(15,144)

Proceeds from termination of derivatives

 

 

22,981

 

 

27,447

Return of investment basis in purchased derivative asset

 

 

121

 

 

137

Net cash used in investing activities

 

 

(253,281)

 

 

(71,208)

 

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 30,

 

    

2017

    

2016

Cash Flows from Financing Activities:

 

 

 

 

 

 

Proceeds from borrowings

 

$

2,134,245

 

$

2,059,599

Principal repayments on and repurchases of borrowings

 

 

(1,590,421)

 

 

(1,711,117)

Payment of deferred financing costs

 

 

(8,211)

 

 

(6,437)

Proceeds from common stock issuances

 

 

369

 

 

177

Payment of equity offering costs

 

 

(647)

 

 

 —

Payment of dividends

 

 

(249,925)

 

 

(229,151)

Contributions from non-controlling interests

 

 

 —

 

 

10,417

Distributions to non-controlling interests

 

 

(3,599)

 

 

(2,350)

Purchase of treasury stock

 

 

 —

 

 

(19,723)

Issuance of debt of consolidated VIEs

 

 

10,188

 

 

596

Repayment of debt of consolidated VIEs

 

 

(79,099)

 

 

(147,523)

Distributions of cash from consolidated VIEs

 

 

38,840

 

 

22,986

Net cash provided by (used in) financing activities

 

 

251,740

 

 

(22,526)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(346,578)

 

 

54,816

Cash, cash equivalents and restricted cash, beginning of period

 

 

650,755

 

 

391,884

Effect of exchange rate changes on cash

 

 

1,016

 

 

(749)

Cash, cash equivalents and restricted cash, end of period

 

$

305,193

 

$

445,951

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

113,564

 

$

91,961

Income taxes paid

 

 

3,362

 

 

2,177

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

Dividends declared, but not yet paid

 

$

125,587

 

$

115,013

Consolidation of VIEs (VIE asset/liability additions)

 

 

1,127,952

 

 

16,850,221

Deconsolidation of VIEs (VIE asset/liability reductions)

 

 

2,108,589

 

 

5,126,980

Net assets acquired from consolidated VIEs

 

 

19,652

 

 

102,976

Settlement of loans transferred as secured borrowings

 

 

35,000

 

 

 —

Fair value of assets acquired, net of cash

 

 

 —

 

 

270,021

Fair value of liabilities assumed

 

 

 —

 

 

170,429

 

See notes to condensed consolidated financial statements.

 

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Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of June 30, 2017

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

 

We have three reportable business segments as of June 30, 2017:

 

·

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

 

·

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. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

 

·

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

 

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

 

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

 

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2. Summary of Significant Accounting Policies

 

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

 

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

 

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

 

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

 

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

 

Basis of Accounting and Principles of Consolidation

 

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

 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2017 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, 2016 due to a corporate action or increase in the significance of the underlying business activity.

 

Variable Interest Entities

 

In addition to the Investing and Servicing Segment’s VIEs, certain other entities in which we hold interests are considered VIEs as the limited partners of these entities do not collectively possess (i) the right to remove the general partner without cause or (ii) the right to participate in significant decisions made by the partnership. 

 

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We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Accounting Standards Codification (“ASC”) 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. We consider our variable interests as well as any variable interests of our related parties in making this determination. Where both of these factors are present, we are deemed to be the primary beneficiary and we consolidate the VIE. Where either one of these factors is not present, we are not the primary beneficiary and do not consolidate the VIE.

 

To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes, (i) identifying the activities that most significantly impact the VIE’s economic performance; and (ii) identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE. The right to remove the decision maker in a VIE must be exercisable without cause for the decision maker to not be deemed the party that has the power to direct the activities of a VIE. 

 

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

 

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

 

For 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

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our condensed consolidated statements of operations in the line item “Change in net assets related to consolidated VIEs” represents our beneficial interest in the VIEs.

 

We separately present the assets and liabilities of our consolidated 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 nonperformance of the loan.  Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value.  Furthermore, when we consolidate a CMBS trust, any existing REO would be consolidated at fair value.  Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.

 

In addition to sharing a similar measurement method as the loans in a CMBS trust, the 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 trust there are no REO assets.  We estimate that REO assets constitute approximately 4% of our consolidated securitization VIE assets, with the remaining 96% 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”) 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 eligible financial assets and liabilities of our consolidated securitization VIEs, loans held-for-sale originated or acquired for future securitization, purchased CMBS issued by VIEs we could consolidate in the future and certain investments in marketable equity securities. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for

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mortgage loans held-for-sale were made due to the short-term nature of these instruments. The fair value elections for investments in marketable equity securities were made because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market.

 

Fair Value Measurements

 

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

 

As discussed above, we measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static” that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the securitization VIE, we maximize the use of observable inputs over unobservable inputs. We also acknowledge that our principal market for selling CMBS assets is the securitization market where the market participant is considered to be a CMBS trust or a collateralized debt obligation (“CDO”). This methodology results in the fair value of the assets of a static CMBS trust being equal to the fair value of its liabilities. Refer to Note 19 for further discussion regarding our fair value measurements.

 

Loans Held-for-Investment and Provision for Loan Losses

 

Loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination costs as applicable, unless the loans are deemed impaired. We evaluate each loan classified as held-for-investment for impairment at least quarterly. 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.

 

Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Actual losses, if any, could ultimately differ from these estimates.

 

Earnings Per Share

 

We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements.  Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) shares contingently issuable to our Manager, and (iii) the “in-the-money” conversion options associated with our outstanding convertible senior notes (see further discussion in Notes 10 and 17). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

 

Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities.  Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities.  For the three and six months ended June 30, 2017 and 2016, the two-class method resulted in the most dilutive EPS calculation.

 

 

 

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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 six months ended June 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, which has a significant impact on the amounts of interest income, credit losses (if any), and fair values that we record and/or disclose. In addition, the fair value of financial assets and liabilities that are estimated using a discounted cash flows method is significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.

 

Recent Accounting Developments

 

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts.  At issuance, the ASU was effective for the first interim or annual period beginning after December 15, 2016. On August 12, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year, resulting in the ASU becoming effective for the first interim or annual period beginning after December 15, 2017.  Though we have not completed our assessment of this ASU, we do not expect its application 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.  The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018 by applying a modified retrospective approach. Early application is permitted. We are in the process of assessing 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. 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 do not expect the application of this ASU to materially impact the Company.

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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 instead of the “incurred loss” credit model that current GAAP requires.  The “expected loss” 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 in accordance with the current “incurred loss” methodology.  The ASU is effective for annual reporting periods, 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.

 

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.

 

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 most real estate acquired by the Company subsequent to the ASU’s effective date will no longer be accounted for as business combinations and instead 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 requires that all entities account for the derecognition of a business in accordance with ASC 810, including instances in which the business is considered in substance real estate.  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.

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3.  Acquisitions and Dispositions

 

Investing and Servicing Segment Property Portfolio

 

During the three and six months ended June 30, 2017, our Investing and Servicing Segment acquired the net equity of a commercial real estate property from a CMBS trust for $19.0 million.  This property, 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 “REO Portfolio”).  When 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 provisions of ASC 805, Business Combinations, in accounting for the REO Portfolio acquisitions. No goodwill was recognized in connection with the REO 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 and $8.8 million was recognized within change in net assets related to consolidated VIEs in our condensed consolidated statement of operations for the three and six months ended June 30, 2017 and the year ended December 31, 2016, respectively, as the fair value of the net assets acquired for certain properties exceeded the purchase price.

 

During the six months ended June 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 REO 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

 

The net income effect associated with the measurement period adjustment during the six months ended June 30, 2017 was immaterial.

 

During the three and six months ended June 30, 2017, we sold two properties within the Investing and Servicing Segment for $14.7 million, recognizing a $5.1 million gain on sale within gain on sale of investments and other assets in our condensed consolidated statements of operations.

 

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.

 

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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 three and six months ended June 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 statements of operations.

 

Purchase Price Allocations of Acquisitions

 

We applied the provisions of ASC 805, Business Combinations, in accounting for the 2017 REO Portfolio acquisition.  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

 

    

REO

Assets acquired:

 

Portfolio

Properties

 

$

18,301

Intangible assets

 

 

1,917

Other assets

 

 

 1

Total assets acquired

 

 

20,219

Liabilities assumed:

 

 

 

Accounts payable, accrued expenses and other liabilities

 

 

567

Total liabilities assumed

 

 

567

Net assets acquired

 

$

19,652

 

 

 

 

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4. Loans

 

Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following tables summarize our investments in mortgages and loans by subordination class as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

   

Weighted

 

 

 

 

 

 

 

 

Weighted

 

Average Life

 

 

Carrying

 

Face

 

Average

 

(“WAL”)

June 30, 2017

 

Value

 

Amount

 

Coupon

 

(years)(1)

First mortgages (2)

 

$

5,312,749

 

$

5,326,758

 

6.3

%  

1.9

Subordinated mortgages (3)

 

 

272,975

 

 

287,506

 

9.6

%  

3.1

Mezzanine loans (2)

 

 

630,383

 

 

630,296

 

10.6

%  

1.5

Other

 

 

1,757

 

 

1,757

 

9.9

%  

1.2

Total loans held-for-investment

 

 

6,217,864

 

 

6,246,317

 

 

 

 

Loans held-for-sale, fair value option

 

 

610,116

 

 

606,139

 

5.4

%  

7.6

Total gross loans

 

 

6,827,980

 

 

6,852,456

 

 

 

 

Loan loss allowance (loans held-for-investment)

 

 

(6,789)

 

 

 —

 

 

 

 

Total net loans

 

$

6,821,191

 

$

6,852,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 


(1)

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.

 

(2)

First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan.  The application of this methodology resulted in mezzanine loans with carrying values of $1.1 billion and $964.1 million being classified as first mortgages as of June 30, 2017 and December 31, 2016, respectively.

 

(3)

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.

 

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As of June 30, 2017, approximately $5.7 billion, or 92.2%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.4%. The following table summarizes our investments in floating rate loans (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

    

 

    

Carrying

   

 

    

Carrying

 

Index

 

Base Rate

 

Value

 

Base Rate

 

Value

 

One-month LIBOR USD

 

1.2239

%

$

889,846

 

0.7717

%

$

880,357

 

LIBOR floor

 

0.15 - 3.00

% (1)  

 

4,845,782

 

0.15 - 3.00

% (1)  

 

4,449,861

 

Total

 

 

 

$

5,735,628

 

 

 

$

5,330,218

 


(1)

The weighted-average LIBOR floor was 0.47% and 0.36% as of June 30, 2017 and December 31, 2016, respectively.

 

Our loans are typically collateralized by real estate. As a result, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and discussions with market participants.

 

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

 

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

 

 

 

 

Rating

 

Characteristics

1

    

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

 

 

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

 

 

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

 

 

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

 

 

 

 

2

 

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

 

 

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

 

 

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

 

 

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

 

 

 

 

3

 

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

 

 

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

 

 

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

 

 

Loan structure—LTV does not exceed 80%.

 

 

 

 

4

 

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

 

 

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

 

 

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

 

 

Loan structure—LTV is 80% to 90%.

 

 

 

 

5

 

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

 

 

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

 

 

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

 

 

Loan structure—LTV exceeds 90%.

 

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As of June 30, 2017, the risk ratings for loans subject to our rating system, which excludes loans for which the fair value option has been elected, by class of loan were as follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Classification

 

 

 

 

 

 

 

 

Loans Held-For-Investment

 

 

 

 

 

 

 

% of

 

Risk Rating

    

First

    

Subordinated

    

Mezzanine

    

 

    

Loans Held-

    

 

    

Total

 

Category

 

Mortgages

 

Mortgages

 

Loans

 

Other

 

For-Sale

 

Total

 

Loans

 

1

 

$

2,414

 

$

 —

 

$

64,915

 

$

 —

 

$

 —

 

$

67,329

 

1.0

%

2

 

 

1,537,502

 

 

4,447

 

 

77,808

 

 

 —

 

 

 —

 

 

1,619,757

 

23.7

%

3

 

 

3,515,892

 

 

268,528

 

 

428,467

 

 

1,757

 

 

 —

 

 

4,214,644

 

61.7

%

4

 

 

198,462

 

 

 —

 

 

59,193

 

 

 —

 

 

 —

 

 

257,655

 

3.8

%

5

 

 

58,479

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

58,479

 

0.9

%

N/A

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

610,116

 

 

610,116

 

8.9

%

 

 

$

5,312,749

 

$

272,975

 

$

630,383

 

$

1,757

 

$

610,116

 

$

6,827,980

 

100.0

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 30, 2017, we concluded that none of our loans were impaired 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 of June 30, 2017.

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

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 30,

 

    

2017

    

2016

Allowance for loan losses at January 1

 

$

9,788

 

$

6,029

Provision for loan losses

 

 

(2,999)

 

 

1,268

Charge-offs

 

 

 —

 

 

 —

Recoveries

 

 

 —

 

 

 —

Allowance for loan losses at June 30

 

$

6,789

 

$

7,297

Recorded investment in loans related to the allowance for loan loss

 

$

316,134

 

$

341,343

 

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

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

 

June 30,

 

 

   

2017

    

2016

 

Balance at January 1

 

$

5,946,274

 

$

6,263,517

 

Acquisitions/originations/additional funding

 

 

2,231,907

 

 

1,492,845

 

Capitalized interest (1)

 

 

33,817

 

 

44,875

 

Basis of loans sold (2)

 

 

(507,613)

 

 

(596,454)

 

Loan maturities/principal repayments

 

 

(948,712)

 

 

(1,199,205)

 

Discount accretion/premium amortization

 

 

16,194

 

 

23,362

 

Changes in fair value

 

 

25,999

 

 

20,126

 

Unrealized foreign currency remeasurement gain (loss)

 

 

19,565

 

 

(33,325)

 

Change in loan loss allowance, net

 

 

2,999

 

 

(1,268)

 

Transfer to/from other asset classifications

 

 

761

 

 

9,353

(3)

Balance at June 30

 

$

6,821,191

 

$

6,023,826

 


(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.

 

(3)

Primarily represents commercial mortgage loans acquired from CMBS trusts which are consolidated as VIEs on our balance sheet.

 

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5. Investment Securities

 

Investment securities were comprised of the following as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

Carrying Value as of

 

   

June 30, 2017

    

December 31, 2016

RMBS, available-for-sale

 

$

256,397

 

$

253,915

CMBS, fair value option (1)

 

 

1,009,151

 

 

990,570

Held-to-maturity (“HTM”) securities

 

 

465,802

 

 

509,980

Equity security, fair value option

 

 

12,887

 

 

12,177

SubtotalInvestment securities

 

 

1,744,237

 

 

1,766,642

VIE eliminations (1)

 

 

(995,303)

 

 

(959,024)

Total investment securities

 

$

748,934

 

$

807,618


(1)

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS,

 

CMBS, fair

 

HTM

 

Equity

 

 

 

 

    

available-for-sale

    

value option

    

Securities

    

Security

    

Total

Three Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases (1)

 

$

7,433

 

$

 —

 

$

 —

 

$

 —

 

$

7,433

Sales (2)

 

 

 —

 

 

700

 

 

 —

 

 

 —

 

 

700

Principal collections

 

 

8,555

 

 

1,322

 

 

332

 

 

 —

 

 

10,209

Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases (1)

 

$

46,866

 

$

24,403

 

$

195,036

 

$

 —

 

$

266,305

Sales (2)

 

 

 —

 

 

1,269

 

 

 —

 

 

 —

 

 

1,269

Principal collections

 

 

16,197

 

 

7,142

 

 

1,861

 

 

 —

 

 

25,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS,

 

CMBS, fair

 

HTM

 

Equity

 

 

 

 

    

available-for-sale

   

value option

   

Securities

   

Security

   

Total

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases (3)

 

$

7,433

 

$

 —

 

$

 —

 

$

 —

 

$

7,433

Sales (4)

 

 

 —

 

 

11,134

 

 

 —

 

 

 —

 

 

11,134

Principal collections

 

 

18,783

 

 

7,088

 

 

60,388

 

 

 —

 

 

86,259

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchases (3)

 

$

88,336

 

$

57,576

 

$

204,730

 

$

 —

 

$

350,642

Sales (4)

 

 

 —

 

 

1,269

 

 

 —

 

 

 —

 

 

1,269

Principal collections

 

 

23,008

 

 

19,445

 

 

5,091

 

 

 —

 

 

47,544


(1)

During the three months ended June 30, 2017 and 2016, we purchased $4.3 million and $54.8 million of CMBS, respectively, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $4.3 million and $30.4 million, respectively, of this amount is eliminated and reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.

 

(2)

During the three months ended June 30, 2017 and 2016, we sold $6.1 million and $1.3 million of CMBS, respectively, for which we had previously elected the fair value option. Due to our consolidation of securitization VIEs, $5.4 million of our sales during the three months ended June 30, 2017 is eliminated and reflected as issuance of debt of consolidated VIEs in our condensed consolidated statements of cash flows. During the three months ended June 30, 2016, none of our sales were eliminated due to the consolidation of securitization VIEs.

 

 

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(3)

During the six months ended June 30, 2017 and 2016, we purchased $61.7 million and $101.3 million of CMBS, respectively, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $61.7 million and $43.8 million, respectively, of this amount is eliminated and reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.

 

(4)

During the six months ended June 30, 2017 and 2016, we sold $21.3 million and $1.9 million of CMBS, respectively, for which we had previously elected the fair value option. Due to our consolidation of securitization VIEs, $10.2 million and $0.6 million, respectively, of this amount is eliminated and reflected as issuance of debt of consolidated VIEs in our condensed consolidated statements of cash flows.

 

RMBS, Available-for-Sale

 

The Company classified all of its RMBS as available-for-sale as of June 30, 2017 and December 31, 2016. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

 

The tables below summarize various attributes of our investments in available-for-sale RMBS as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized Gains or (Losses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recognized in AOCI

 

 

 

 

   

Purchase

   

 

 

   

Recorded

   

 

 

   

Gross

   

Gross

 

Net

   

 

 

 

 

Amortized

 

Credit

 

Amortized

 

Non-Credit

 

Unrealized

 

Unrealized

 

Fair Value

 

 

 

 

 

Cost

 

OTTI

 

Cost

 

     OTTI     

 

Gains

 

Losses

 

Adjustment

 

Fair Value

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

214,612

 

$

(9,897)

 

$

204,715

 

$

(48)

 

$

51,730

 

$

 —

 

$

51,682

 

$

256,397

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

219,171

 

$

(10,185)

 

$

208,986

 

$

(94)

 

$

45,113

 

$

(90)

 

$

44,929

 

$

253,915

 

 

 

 

 

 

 

 

 

    

Weighted Average Coupon (1)

    

Weighted Average
Rating

    

WAL 
(Years) (2)

June 30, 2017

 

 

 

 

 

 

RMBS

   

2.4

%  

B-

   

6.5

December 31, 2016

 

 

 

 

 

 

RMBS

 

2.1

%  

B

 

6.1


(1)

Calculated using the June 30, 2017 and December 31, 2016 one-month LIBOR rate of 1.224% and 0.772%, respectively, for floating rate securities.

 

(2)

Represents the WAL of each respective group of securities as of the respective balance sheet date. The WAL of each individual security is calculated using projected amounts and projected timing of future principal payments.

 

As of June 30, 2017, approximately $213.4 million, or 83.2%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.20%. As of December 31, 2016, approximately $211.1 million, or 83.2%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.22%. We purchased all of the RMBS at a discount that will be accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of these discounts.

 

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The following table contains a reconciliation of aggregate principal balance to amortized cost for our RMBS as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

    

June 30, 2017

    

December 31, 2016

 

Principal balance

 

$

391,200

 

$

399,883

 

Accretable yield

 

 

(59,777)

 

 

(64,290)

 

Non-accretable difference

 

 

(126,708)

 

 

(126,607)

 

Total discount

 

 

(186,485)

 

 

(190,897)

 

Amortized cost

 

$

204,715

 

$

208,986

 

 

The principal balance of credit deteriorated RMBS was $366.2 million and $371.5 million as of June 30, 2017 and December 31, 2016, respectively. Accretable yield related to these securities totaled $52.5 million and $55.9 million as of June 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 six months ended June 30, 2017 (amounts in thousands):

 

 

 

 

 

 

 

 

 

    

 

    

Non-Accretable

Three Months Ended June 30, 2017

 

Accretable Yield

 

Difference

Balance as of April 1, 2017

 

$

60,818

 

$

124,742

Accretion of discount

 

 

(3,302)

 

 

 —

Principal write-downs, net

 

 

 —

 

 

(916)

Purchases

 

 

311

 

 

4,723

Sales

 

 

 —

 

 

 —

OTTI

 

 

109

 

 

 —

Transfer to/from non-accretable difference

 

 

1,841

 

 

(1,841)

Balance as of June 30, 2017

 

$

59,777

 

$

126,708

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

 

 

 

Balance as of January 1, 2017

 

$

64,290

 

$

126,607

Accretion of discount

 

 

(7,188)

 

 

 —

Principal write-downs, net

 

 

 —

 

 

(2,367)

Purchases

 

 

311

 

 

4,723

Sales

 

 

 —

 

 

 —

OTTI

 

 

109

 

 

 —

Transfer to/from non-accretable difference

 

 

2,255

 

 

(2,255)

Balance as of June 30, 2017

 

$

59,777

 

$

126,708

 

We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.5 million and $0.3 million for the three months ended June 30, 2017 and 2016, respectively, and $0.9 million and $0.7 million for the six months ended June 30, 2017 and 2016, respectively, which has been recorded as management fees in the accompanying condensed consolidated statements of operations.

 

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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 June 30, 2017 and December 31, 2016, and for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

Unrealized Losses

 

 

    

Securities with a

    

Securities with a

   

Securities with a

    

Securities with a

 

 

 

loss less than

 

loss greater than

 

loss less than

 

loss greater than

 

 

 

12 months

 

12 months

 

12 months

 

12 months

 

As of June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

 —

 

$

649

 

$

 —

 

$

(48)

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

RMBS

 

$

8,819

 

$

957

 

$

(90)

 

$

(94)

 

 

As of June 30, 2017 and December 31, 2016, there were one and three securities, respectively, with unrealized losses reflected in the table above. After evaluating these securities and recording adjustments for credit-related OTTI, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses, which represent most of the OTTI we record on securities, are calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) our amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or impairments could be materially different from what is currently projected and/or reported.

 

CMBS, Fair Value Option

 

As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for the Investing and Servicing Segment’s CMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of June 30, 2017, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, were $1.0 billion and $4.1 billion, respectively. The $1.0 billion fair value balance represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($995.3 million at June 30, 2017) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS.

 

As of June 30, 2017, none of our CMBS where we have elected the fair value option were variable rate.

 

HTM Securities

 

The table below summarizes unrealized gains and losses of our investments in HTM securities as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Carrying Amount

 

Gross Unrealized

 

Gross Unrealized

 

 

 

 

 

 

(Amortized Cost)

 

Holding Gains

 

Holding Losses

 

Fair Value

 

June 30, 2017

    

 

 

    

 

 

    

 

 

    

 

 

 

CMBS

 

$

445,691

 

$

3,262

 

$

(6,482)

 

$

442,471

 

Preferred interests

 

 

20,111

 

 

697

 

 

 —

 

 

20,808

 

Total

 

$

465,802

 

$

3,959

 

$

(6,482)

 

$

463,279

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS

 

$

490,107

 

$

2,106

 

$

(8,648)

 

$

483,565

 

Preferred interests

 

 

19,873

 

 

727

 

 

 —

 

 

20,600

 

Total

 

$

509,980

 

$

2,833

 

$

(8,648)

 

$

504,165

 

 

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The table below summarizes the maturities of our HTM CMBS and our HTM preferred equity interests in limited liability companies that own commercial real estate as of June 30, 2017 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred

 

 

 

 

    

CMBS

    

Interests

    

Total

Less than one year

 

$

240,439

 

$

 —

 

$

240,439

One to three years

 

 

189,041

 

 

 —

 

 

189,041

Three to five years

 

 

16,211

 

 

 —

 

 

16,211

Thereafter

 

 

 —

 

 

20,111

 

 

20,111

Total

 

$

445,691

 

$

20,111

 

$

465,802

 

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 $12.9 million and $12.2 million as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, our shares represent an approximate 2% interest in SEREF.

 

6. Properties

 

Our properties include the Medical Office Portfolio, Woodstar Portfolio, REO Portfolio and Ireland Portfolio as discussed in Note 3. The table below summarizes our properties held as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Depreciable Life

   

June 30, 2017

   

December 31, 2016

Property Segment

 

 

 

 

 

 

 

 

Land and land improvements

 

0 – 12 years

 

$

397,427

 

$

385,860

Buildings and building improvements

 

5 – 40 years

 

 

1,312,982

 

 

1,291,531

Furniture & fixtures

 

3 – 7 years

 

 

24,651

 

 

23,035

Investing and Servicing Segment

 

 

 

 

 

 

 

 

Land and land improvements

 

0 – 15 years

 

 

87,711

 

 

89,425

Buildings and building improvements

 

3 – 40 years

 

 

209,180

 

 

195,178

Furniture & fixtures

 

3 – 5 years

 

 

1,333

 

 

1,256

Properties, cost

 

 

 

 

2,033,284

 

 

1,986,285

Less: accumulated depreciation

 

 

 

 

(72,786)

 

 

(41,565)

Properties, net

 

 

 

$

1,960,498

 

$

1,944,720

 

During the three and six months ended June 30, 2017, we sold three operating properties for $18.6 million which resulted in a $5.2 million gain recognized within gain on sale of investments and other assets in our condensed consolidated statement of operations. There were no properties sold during the six months ended June 30, 2016.

 

 

 

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7. Investment in Unconsolidated Entities

 

The table below summarizes our investments in unconsolidated entities as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Participation /

 

Carrying value as of

 

  

Ownership % (1)

    

June 30, 2017

    

December 31, 2016

Equity method:

 

 

 

 

 

 

 

 

Retail Fund

 

33%

 

$

127,795

 

$

124,977

Investor entity which owns equity in an online real estate company

 

50%

 

 

47,058

 

 

21,677

Equity interests in commercial real estate

 

16% - 50%

 

 

23,219

 

 

23,297

Various

 

25% - 50%

 

 

6,689

 

 

6,640

 

 

 

 

 

204,761

 

 

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

 

2% - 3%

 

 

3,319

 

 

6,555

 

 

 

 

 

24,778

 

 

28,014

 

 

 

 

$

229,539

 

$

204,605


(1)

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

 

During the three months ended June 30, 2017, we recognized $25.7 million of income related to our investment in an investor entity which owns equity in an online real estate company.  The investor entity holds a variety of equity instruments in the online real estate company, some of which are marked to market.  The income we recognized during the three months ended June 30, 2017 represents our share of an increase in the fair value of those instruments (see related income tax effect in Note 20). There were no differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of June 30, 2017.

 

8. Goodwill and Intangibles

 

Goodwill

 

Goodwill at June 30, 2017 and December 31, 2016 represented the excess of consideration transferred over the fair value of net assets of LNR Property LLC (“LNR”) acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes an international network of commercial real estate asset managers, work-out specialists, underwriters and administrative support professionals as well as proprietary historical performance data on commercial real estate assets.

 

Intangible Assets

 

Servicing Rights Intangibles

 

In connection with the LNR acquisition, we identified domestic and European servicing rights that existed at the purchase date, based upon the expected future cash flows of the associated servicing contracts. 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 June 30, 2017 and December 31, 2016, the balance of the domestic servicing intangible was net of $27.4 million and $34.2 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 June 30, 2017 and

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December 31, 2016, the domestic servicing intangible had a balance of $66.0 million and $89.3 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 noncancelable operating leases of the acquired properties.

 

The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2017

 

As of December 31, 2016

 

    

Gross Carrying

    

Accumulated

    

Net Carrying

    

Gross Carrying

    

Accumulated

    

Net Carrying

 

 

Value

 

Amortization

 

Value

 

Value

 

Amortization

 

Value

Domestic servicing rights, at fair value

 

$

38,648

 

$

 —

 

$

38,648

 

$

55,082

 

$

 —

 

$

55,082

In-place lease intangible assets

 

 

179,362

 

 

(52,838)

 

 

126,524

 

 

175,409

 

 

(38,532)

 

 

136,877

Favorable lease intangible assets

 

 

31,523

 

 

(5,329)

 

 

26,194

 

 

30,459

 

 

(3,170)

 

 

27,289

Total net intangible assets

 

$

249,533

 

$

(58,167)

 

$

191,366

 

$

260,950

 

$

(41,702)

 

$

219,248

 

The following table summarizes the activity within intangible assets for the six months ended June 20, 2017 (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 REO Portfolio properties

 

 

 —

 

 

1,821

 

 

96

 

 

1,917

Amortization

 

 

 —

 

 

(13,364)

 

 

(1,948)

 

 

(15,312)

Foreign exchange (loss) gain

 

 

 —

 

 

2,769

 

 

738

 

 

3,507

Impairment (1)

 

 

 —

 

 

(758)

 

 

 —

 

 

(758)

Changes in fair value due to changes in inputs and assumptions

 

 

(16,434)

 

 

 —

 

 

 —

 

 

(16,434)

Measurement period adjustments

 

 

 —

 

 

(821)

 

 

19

 

 

(802)

Balance as of June 30, 2017

 

$

38,648

 

$

126,524

 

$

26,194

 

$

191,366


(1)

Impairment of intangible lease assets is recognized within other expense in our condensed consolidated statements of operations.

 

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)

    

$

15,038

2018

 

 

27,101

2019

 

 

20,672

2020

 

 

15,504

2021

 

 

13,290

Thereafter

 

 

61,113

Total

 

$

152,718

 

 

 

 

 

 

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9. Secured Financing Agreements

 

The following table is a summary of our secured financing agreements in place as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value at

 

   

Current
Maturity

   

Extended
Maturity (a)

   

Pricing

   

Pledged Asset
Carrying Value

   

Maximum
Facility Size

   

June 30, 2017

   

December 31, 2016

Lender 1 Repo 1

 

(b)

 

(b)

 

LIBOR + 1.75% to 5.75%

 

$

1,637,815

 

$

2,000,000

(c) 

$

1,196,618

 

$

944,712

Lender 2 Repo 1

 

Oct 2017

 

Oct 2020

 

LIBOR + 1.75% to 2.75%

 

 

363,744

 

 

500,000

 

 

110,646

 

 

132,941

Lender 3 Repo 1

 

May 2018

 

May 2019

 

LIBOR + 2.75% to 3.10%

 

 

110,193

 

 

77,645

 

 

77,645

 

 

78,288

Lender 4 Repo 2

 

Dec 2018

 

Dec 2020

 

LIBOR + 2.00% to 2.50%

 

 

624,738

 

 

1,000,000

(d) 

 

230,740

 

 

166,394

Lender 6 Repo 1

 

Aug 2019

 

N/A

 

LIBOR + 2.50% to 2.75%

 

 

268,037

 

 

500,000

 

 

210,254

 

 

182,586

Lender 6 Repo 2

 

Nov 2019

 

Nov 2020

 

GBP LIBOR + 2.75%

 

 

181,171

 

 

126,627

 

 

126,627

 

 

121,509

Lender 9 Repo 1

 

Dec 2017

 

Dec 2018

 

LIBOR + 1.65%

 

 

379,111

 

 

283,575

 

 

283,575

 

 

283,575

Lender 10 Repo 1

 

Mar 2020

 

Mar 2022

 

LIBOR + 2.00% to 2.75%

 

 

169,610

 

 

140,000

 

 

136,800

 

 

 —

Lender 11 Repo 1

 

Jun 2019

 

Jun 2020

 

LIBOR + 2.75%

 

 

 —

 

 

200,000

 

 

 —

 

 

 —

Lender 7 Secured Financing

 

Jul 2018

 

Jul 2019

 

LIBOR + 2.75%

(e)

 

85,324

 

 

650,000

(f)

 

 —

 

 

 —

Lender 8 Secured Financing

 

Aug 2019

 

N/A

 

LIBOR + 4.00%

 

 

49,183

 

 

75,000

 

 

32,124

 

 

43,555

Conduit Repo 2

 

Nov 2017

 

N/A

 

LIBOR + 2.25%

 

 

138,789

 

 

150,000

 

 

109,070

 

 

14,944

Conduit Repo 3

 

Feb 2018

 

N/A

 

LIBOR + 2.10%

 

 

 —

 

 

150,000

 

 

 —

 

 

 —

Conduit Repo 4

 

Oct 2017

 

Oct 2020

 

LIBOR + 2.25%

 

 

 —

 

 

100,000

 

 

 —

 

 

 —

MBS Repo 1

 

(g)

 

(g)

 

LIBOR + 1.90%

 

 

31,250

 

 

20,838

 

 

20,838

 

 

21,052

MBS Repo 2

 

Jun 2020

 

N/A

 

LIBOR/EURIBOR + 2.00% to 2.95%

 

 

344,829

 

 

250,178

 

 

250,178

 

 

239,434

MBS Repo 3

 

(h)

 

(h)

 

LIBOR + 1.32% to 1.95%

 

 

386,771

 

 

256,832

 

 

256,832

 

 

285,209

MBS Repo 4

 

(i)

 

N/A

 

LIBOR + 1.20% to 1.90%

 

 

184,678

 

 

225,000

 

 

32,000

 

 

5,633

Investing and Servicing Segment Property Mortgages

 

Feb 2018 to Jun 2026

 

N/A

 

Various

 

 

235,310

 

 

192,596

 

 

172,953

 

 

164,611

Ireland Portfolio Mortgage

 

May 2020

 

N/A

 

EURIBOR + 1.69%

 

 

477,387

 

 

333,225

 

 

333,225

 

 

309,246

Woodstar Portfolio Mortgages

 

Nov 2025 to Oct 2026

 

N/A

 

3.72% to 3.97%

 

 

371,409

 

 

276,748

 

 

276,748

 

 

276,748

Woodstar Portfolio Government Financing

 

Mar 2026 to Jun 2049

 

N/A

 

1.00% to 5.00%

 

 

310,303

 

 

134,510

 

 

134,510

 

 

135,584

Medical Office Portfolio Mortgages

 

Dec 2021 to Feb 2022

 

Dec 2023 to Feb 2024

 

LIBOR + 2.50%

(j)

 

749,973

 

 

531,815

 

 

497,613

 

 

491,197

Term Loan A

 

Dec 2020

 

Dec 2021

 

LIBOR + 2.25%

(e)

 

858,717

 

 

300,000

 

 

300,000

 

 

300,000

Revolving Secured Financing

 

Dec 2020

 

Dec 2021

 

LIBOR + 2.25%

(e)

 

 —

 

 

100,000

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

$

7,958,342

 

$

8,574,589

 

 

4,788,996

 

 

4,197,218

Unamortized net premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,599

 

 

2,640

Unamortized deferred financing costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,672)

 

 

(45,732)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,750,923

 

$

4,154,126

(a)

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

(b)

Maturity date for borrowings collateralized by loans is September 2018 before extension options and September 2021 assuming exercise of extension options.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed September 2025.

(c)

The initial maximum facility size of $1.8 billion may be increased to $2.0 billion, subject to certain conditions.

(d)

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

(e)

Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement.

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(f)

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

(g)

Facility carries a rolling 11 month term which may reset monthly with the lender’s consent not to exceed December 2018. This facility carries no maximum facility size.  Amounts reflect the outstanding balance as of June 30, 2017.

(h)

Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is June 2018. This facility carries no maximum facility size. Amounts reflect the outstanding balance as of June 30, 2017.

(i)

The date that is 270 days after the buyer delivers notice to seller, subject to a maximum date of May 2018.

(j)

Subject to a 25 basis point floor.

 

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.

 

In February 2017, we entered into a mortgage loan with maximum borrowings of $24.0 million to finance commercial real estate previously acquired by our Investing and Servicing Segment. This facility carries a term of five years with an annual interest rate of LIBOR + 2.00%.

 

In February 2017, we entered into a mortgage loan with maximum borrowings of $7.3 million as part of the Medical Office Portfolio Mortgages. This loan carries a five year initial term with two 12 month extension options and an annual interest rate of LIBOR + 2.50%.

 

In March 2017, we entered into a $125.0 million repurchase facility (“Lender 10 Repo 1”) to finance certain loans held-for-investment.  The facility carries a three year initial term with two one-year extension options and 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 facility to extend the maturity from May 2017 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%.

 

Our secured financing agreements contain certain financial tests and covenants. As of June 30, 2017, we were in compliance with all such covenants.

 

The following table sets forth our five‑year principal repayments schedule for secured financings assuming no defaults and excluding loans transferred as secured borrowings. Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The amount reflected in each period includes principal repayments on our credit facilities that would be required if (i) we received the repayments that we expect to receive on the investments that have been pledged as collateral under the credit facilities, as applicable, and (ii) the credit facilities that are expected to have

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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)

 

$

876,451

 

$

34,118

 

$

910,569

2018

 

 

894,295

 

 

68,064

 

 

962,359

2019

 

 

402,900

 

 

5,115

 

 

408,015

2020

 

 

578,062

 

 

346,675

 

 

924,737

2021

 

 

135,353

 

 

315,687

 

 

451,040

Thereafter

 

 

154,762

 

 

977,514

 

 

1,132,276

Total

 

$

3,041,823

 

$

1,747,173

 

$

4,788,996

 

For the three and six months ended June 30, 2017, approximately $4.7 million and $9.4 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 six months ended June 30, 2016, approximately $4.3 million and $8.2 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 June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

Class of Collateral

 

June 30, 2017

 

December 31, 2016

Loans held-for-investment

    

$

2,305,593

    

$

1,890,925

Loans held-for-sale

 

 

176,382

 

 

34,024

Investment securities

 

 

559,848

 

 

551,328

 

 

$

3,041,823

 

$

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 59% of these agreements, do not permit valuation adjustments based on capital markets activity.  Instead, margin calls on these facilities are limited to collateral-specific credit marks.  To monitor credit risk associated with the performance and value of our loans and investments, our asset management team regularly reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.  For repurchase agreements containing margin call provisions for general capital markets activity, approximately 19% 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.

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10. Unsecured Senior Notes

 

The following table is a summary of our unsecured senior notes outstanding as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

 

 

 

 

 

 

Coupon

 

Effective

 

Maturity

 

Period of

 

Carrying Value at

 

 

Rate

 

Rate (1)

 

Date

 

Amortization

 

June 30, 2017

 

December 31, 2016

2017 Convertible Notes

 

3.75

%  

5.86

%  

10/15/2017

 

0.3

years

 

$

411,885

 

$

411,885

2018 Convertible Notes

 

4.55

%  

6.10

%  

3/1/2018

 

0.7

years

 

 

369,981

 

 

599,981

2019 Convertible Notes

 

4.00

%  

5.35

%  

1/15/2019

 

1.5

years

 

 

341,363

 

 

341,363

2021 Senior Notes

 

5.00

%  

5.32

%  

12/15/2021

 

4.5

years

 

 

700,000

 

 

700,000

2023 Convertible Notes

 

4.38

%  

4.86

%  

4/1/2023

 

5.8

years

 

 

250,000

 

 

 —

Total principal amount

 

 

 

 

 

 

 

 

 

 

 

2,073,229

 

 

2,053,229

Unamortized discount—Convertible Notes

 

 

 

 

 

 

 

 

 

 

 

(19,110)

 

 

(26,135)

Unamortized discount—Senior Notes

 

 

 

 

 

 

 

 

 

 

 

(8,864)

 

 

(9,728)

Unamortized deferred financing costs

 

 

 

 

 

 

 

 

 

 

 

(6,169)

 

 

(5,822)

Carrying amount of debt components

 

 

 

 

 

 

 

 

 

 

$

2,039,086

 

$

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 convertible notes, the value of which reduced the initial liability and was recorded in additional paid‑in‑capital.

 

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 million 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 million and $3.8 million 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 million and was recognized as a reduction of additional paid-in capital during the six months ended June 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 in our condensed consolidated statement of operations during the six months ended June 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 for future

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repurchases under the repurchase program. There were no repurchases of Convertible Notes during the six months ended June 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 June 30, 2017 (amounts in thousands, except rates):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

Conversion Spread Value - Shares (3)

 

 

Conversion

 

Conversion

 

For the Three Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

Rate (1)

 

Price (2)

 

2017

 

2016

 

2017

 

2016

2017 Notes

 

41.7397

 

$

23.96

 

 —

 

 —

 

 —

 

 —

2018 Notes

 

47.7946

 

$

20.92

 

1,162

 

 —

 

1,157

 

 —

2019 Notes

 

50.4531

 

$

19.82

 

1,980

 

441

 

1,971

 

456

2023 Notes

 

38.5959

 

$

25.91

 

 —

 

 —

 

 —

 

 —

 

 

 

 

 

 

 

3,142

 

441

 

3,128

 

456


(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) as a result of the spin-off of our former single family residential segment to our stockholders in January 2014 and cash dividend payments.

 

(2)

As of June 30, 2017 and 2016, the market price of the Company’s common stock was $22.39 and $20.72 per share, respectively.

 

(3)

The conversion spread value represents the portion of the convertible senior notes that are “in-the-money”, representing the value that would be delivered to investors in shares upon an assumed conversion.

 

The if-converted values of the 2018 Notes and 2019 Notes exceeded their principal amounts by $26.0 million and $44.3 million, respectively, at June 30, 2017 as the closing market price of the Company’s common stock of $22.39 per share exceeded the implicit conversion prices of $20.92 and $19.82 per share, respectively. However, the if‑converted values of the 2017 Notes and 2023 Notes were less than their principal amounts by $27.0 million and $34.0 million, respectively, at June 30, 2017 as the closing market price of the Company’s common stock was less than the implicit conversion prices of $23.96 and $25.91 per share, respectively.

 

The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash.  As such, only the conversion spread value, if any, is included in the computation of diluted EPS. 

 

Conditions for Conversion

 

Prior to September 1, 2017 for the 2018 Notes, July 15, 2018 for the 2019 Notes and October 1, 2022 for the 2023 Notes, the Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is at least 110%, in the case of the 2023 Notes, or 130%, in the case of the 2018 Notes and the 2019 Notes, of the conversion price of the respective Convertible Notes for at least 20 out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10% or (4) certain other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.

 

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On or after September 1, 2017, in the case of the 2018 Notes, 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 April 15, 2017, the 2017 Notes entered the open conversion period and may be converted at any time through their maturity date of October 15, 2017.

 

11. Loan Securitization/Sale Activities

 

As described below, we regularly sell loans and notes under various strategies. We evaluate such sales as to whether they meet the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint, and transfer of control.

 

Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in part by these assets, as well as other assets transferred to the VIE. In certain instances, we retain a subordinated interest in the VIE and serve as special servicer for the VIE. The following summarizes the fair value and par value of loans sold from our conduit platform, as well as the amount of sale proceeds used in part to repay the outstanding balance of the repurchase agreements associated with these loans for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

    

2016

    

2017

    

2016

Fair value of loans sold

 

$

291,182

 

$

218,369

 

$

470,478

 

$

475,333

Par value of loans sold

 

 

272,293

 

 

204,960

 

 

440,857

 

 

456,862

Repayment of repurchase agreements

 

 

206,461

 

 

153,574

 

 

332,979

 

 

342,781

 

Within the Lending Segment, we originate or acquire loans and then subsequently sell a portion, which can be in various forms including first mortgages, A-Notes, senior participations and mezzanine loans. Typically, our motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will retain and hold for investment. In certain instances, we continue to service the loan following its sale. The following table summarizes our loans sold and loans transferred as secured borrowings by the Lending Segment net of expenses (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan Transfers

 

 

Loan Transfers Accounted

 

Accounted for as Secured

 

 

for as Sales

 

Borrowings

 

   

Face Amount

   

Proceeds

 

Face Amount

    

Proceeds

For the Three Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

 —

 

$

 —

 

$

 —

 

$

 —

2016

 

 

23,977

 

 

23,394

 

 

 —

 

 

 —

For the Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

38,750

 

$

37,079

 

$

 —

 

$

 —

2016

 

 

122,514

 

 

121,276

 

 

 —

 

 

 —

 

During the three and six months ended June 30, 2017 and 2016, gains (losses) recognized by the Lending Segment on sales of loans were not material.

 

 

 

 

 

 

 

 

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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 six outstanding interest rate swaps that have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of June 30, 2017, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $50.5 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.60% to 1.52% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges of interest rate risk have maturities ranging from August 2017 to May 2021.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2017 and 2016, we did not recognize any hedge ineffectiveness in earnings.

 

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next 12 months, we estimate that an 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 of 47 months.


Non-designated Hedges

 

We have entered into a series of forward contracts whereby we agreed to sell an amount of foreign currency for an agreed upon amount of USD at various dates through 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 investments and properties.

 

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The following table summarizes our non-designated foreign exchange (“Fx”) forwards, interest rate contracts, and credit index instruments as of June 30, 2017 (notional amounts in thousands):

 

 

 

 

 

 

 

 

 

 

Type of Derivative

    

Number of Contracts

    

Aggregate Notional Amount

    

Notional Currency

    

Maturity

Fx contracts – Buy Danish Krone ("DKK")

 

 1

 

5,947

 

DKK

 

September 2017

Fx contracts – Buy Euros ("EUR")

 

 2

 

1,728

 

EUR

 

September 2017

Fx contracts – Buy Norwegian Krone ("NOK")

 

 1

 

836

 

NOK

 

September 2017

Fx contracts – Buy Swedish Krona ("SEK")

 

 1

 

1,138

 

SEK

 

September 2017

Fx contracts – Sell DKK

 

 1

 

5,960

 

DKK

 

September 2017

Fx contracts – Sell EUR (1)

 

49

 

289,453

 

EUR

 

August 2017 – June 2020

Fx contracts – Sell Pounds Sterling ("GBP")

 

133

 

236,257

 

GBP

 

July 2017 – July 2020

Fx contracts – Sell NOK

 

 1

 

836

 

NOK

 

September 2017

Fx contracts – Sell SEK

 

 1

 

1,317

 

SEK

 

September 2017

Interest rate swaps – Paying fixed rates

 

58

 

898,640

 

USD

 

April 2019 – July 2027

Interest rate swaps – Receiving fixed rates

 

 2

 

9,600

 

USD

 

July 2017 – May 2027

Interest rate caps

 

 2

 

294,000

 

EUR

 

May 2020

Interest rate caps

 

 7

 

60,066

 

USD

 

June 2018 – October 2021

Interest rate swaption

 

 1

 

232,500

 

USD

 

November 2017

Credit index instruments

 

10

 

59,000

 

USD

 

September 2058 – November 2059

Total

 

270

 

 

 

 

 

 


(1)

Includes 36 Fx contracts entered into to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio.  As of June 30, 2017, these contracts have an aggregate notional amount of €233.6 million and varying maturities through June 2020.

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 June 30, 2017 and December 31, 2016 (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,

 

    

2017

    

2016

    

2017

    

2016

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

59

 

$

30

 

$

 7

 

$

56

Total derivatives designated as hedging instruments

 

 

59

 

 

30

 

 

 7

 

 

56

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

 

26,921

 

 

26,591

 

 

34

 

 

3,484

Foreign exchange contracts

 

 

17,786

 

 

62,295

 

 

8,010

 

 

364

Credit index instruments

 

 

1,312

 

 

445

 

 

 —

 

 

 —

Total derivatives not designated as hedging instruments

 

 

46,019

 

 

89,331

 

 

8,044

 

 

3,848

Total derivatives 

 

$

46,078

 

$

89,361

 

$

8,051

 

$

3,904


(1)

Classified as derivative assets in our condensed consolidated balance sheets.

 

(2)

Classified as derivative liabilities in our condensed consolidated balance sheets.

 

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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 six months ended June 30, 2017 and 2016 (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 June 30,

 

(effective portion)

 

(effective portion)

 

(ineffective portion)

 

Recognized in Income

2017

 

$

 1

 

$

(1)

 

$

 —

 

Interest expense

2016

 

$

(136)

 

$

(88)

 

$

 —

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

2017

 

$

48

 

$

(30)

 

$

 —

 

Interest expense

2016

 

$

(504)

 

$

(183)

 

$

 —

 

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

  

2017

  

2016

  

2017

  

2016

Interest rate contracts

 

(Loss) gain on derivative financial instruments

 

$

(7,822)

 

$

(7,273)

 

$

(6,354)

 

$

(25,273)

Foreign exchange contracts

 

(Loss) gain on derivative financial instruments

 

 

(29,422)

 

 

27,899

 

 

(35,164)

 

 

21,349

Credit index instruments

 

(Loss) gain on derivative financial instruments

 

 

(342)

 

 

(373)

 

 

(417)

 

 

(541)

 

 

 

 

$

(37,586)

 

$

20,253

 

$

(41,935)

 

$

(4,465)

 

 

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 June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

46,078

 

$

 —

 

$

46,078

 

$

7,613

 

$

 —

 

$

38,465

Derivative liabilities

 

$

8,051

 

$

 —

 

$

8,051

 

$

7,613

 

$

 —

 

$

438

Repurchase agreements

 

 

3,041,823

 

 

 —

 

 

3,041,823

 

 

3,041,823

 

 

 —

 

 

 —

 

 

$

3,049,874

 

$

 —

 

$

3,049,874

 

$

3,049,436

 

$

 —

 

$

438

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative assets

 

$

89,361

 

$

 

$

89,361

 

$

491

 

$

 —

 

$

88,870

Derivative liabilities

 

$

3,904

 

$

 

$

3,904

 

$

491

 

$

3,413

 

$

 —

Repurchase agreements

 

 

2,476,277

 

 

 

 

2,476,277

 

 

2,476,277

 

 

 

 

 

 

$

2,480,181

 

$

 

$

2,480,181

 

$

2,476,768

 

$

3,413

 

$

 —

 

 

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14. Variable Interest Entities

 

Investment Securities

 

As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation, including our investments in CMBS and our retained interests in securitization transactions we initiated, all of which are generally considered to be variable interests in VIEs.

 

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.

 

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.

 

We also hold controlling interests in certain other entities that are considered VIEs, which were established to facilitate the purchase of certain properties acquired with third party minority interest partners. We are the primary beneficiaries of these VIEs as we possess both the power to direct the activities of the VIEs that most significantly impact their economic performance and hold significant economic interests.  These VIEs had assets of $179.3 million and liabilities of $117.7 million as of June 30, 2017.

 

VIEs in which we are not the Primary Beneficiary

 

In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not appointed, or do not serve as, special servicer or (ii) an unrelated third party has the rights to unilaterally remove us as special servicer without cause. In these instances, we do not have the power to direct activities that most significantly impact the VIE’s economic performance. In other cases, the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant. For these structures, we are not deemed to be the primary beneficiary of the VIE, and we do not consolidate these VIEs.

 

As of June 30, 2017, two of our CDO structures were in default, one of which entered default during the three months ended June 30, 2017.  Pursuant to the underlying indentures, the rights of the variable interest holders change 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 quarter ended June 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 June 30, 2017.  As of June 30, 2017, neither 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

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involvement in these VIEs is limited to the carrying value of our investment in the entity. As of June 30, 2017, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $13.8 million on a fair value basis.

 

As of June 30, 2017, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances of $5.7 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 $137.0 million as of June 30, 2017, 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 of $137.0 million plus $15.5 million of unfunded commitments related to one of these VIEs.

 

15. Related-Party Transactions

 

Management Agreement

 

We are party to a management agreement (the “Management Agreement”) with our Manager. Under the Management Agreement, our Manager, subject to the oversight of our board of directors, is required to manage our day to day activities, for which our Manager receives a base management fee and is eligible for an incentive fee and stock awards. Our Manager’s personnel perform certain due diligence, legal, management and other services that outside professionals or consultants would otherwise perform. As such, in accordance with the terms of our Management Agreement, our Manager is paid or reimbursed for the documented costs of performing such tasks, provided that such costs and reimbursements are in amounts no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.

 

Base Management Fee.  For the three months ended June 30, 2017 and 2016, approximately $16.9 million and $15.1 million, respectively, was incurred for base management fees. For the six months ended June 30, 2017 and 2016, approximately $33.8 million and $30.2 million, respectively, was incurred for base management fees. As of June 30, 2017 and December 31, 2016, there were $16.9 million and $15.7 million, respectively, of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.

 

Incentive Fee.  For the three months ended June 30, 2017 and 2016, approximately $4.3 million and $2.9 million, respectively, was incurred for incentive fees. For the six months ended June 30, 2017 and 2016, approximately $9.8 million and $7.5 million, respectively, was incurred for incentive fees. As of June 30, 2017 and December 31, 2016, approximately $4.3 million and $19.0 million, respectively, of unpaid incentive fees were included in related-party payable in our condensed consolidated balance sheets.

 

Expense Reimbursement.  For the three months ended June 30, 2017 and 2016, approximately $1.3 million and $1.5 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 six months ended June 30, 2017 and 2016, approximately $2.8 million and $2.6 million, respectively, was incurred for executive compensation and other reimbursable expenses. As of June 30, 2017 and December 31, 2016, approximately $1.5 million and $3.0 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 June 30, 2017 and 2016, there were no RSAs granted. Expenses related to the vesting of awards to employees of affiliates of our Manager were $0.8 million and $0.6 million during the three months ended June 30, 2017 and 2016, respectively, and are reflected in general and administrative expenses in our

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condensed consolidated statements of operations. During the six months ended June 30, 2017 and 2016, we granted 138,264 and 169,104 RSAs, respectively, at grant date fair values of $3.1 million and $3.3 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $1.4 million and $1.0 million during the six months ended June 30, 2017 and 2016, respectively. These shares generally vest over a three-year period.

 

Manager Equity Plan

 

In March 2017, we granted 1,000,000 RSUs to our Manager under the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”). In May 2015, we granted 675,000 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 $2.9 million and $5.3 million within management fees in our condensed consolidated statements of operations for the three months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, we recognized $4.4 million and $10.1 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 fully 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.  Of the $50.0 million, which was included within loans held-for-sale in our condensed consolidated balance sheet at June 30, 2017, $15.0 million was sold subsequent to June 30, 2017, and the remaining $35.0 million is expected to be sold later this year into securitization transactions.

 

In June 2017, we amended a £75.0 million first mortgage for the development of a three-property mixed use portfolio located in Greater London, which we co-originated with SEREF, an affiliate of our Manager, in 2016. The amendment reduced the first mortgage’s total commitment to £69.3 million, of which our share is £55.4 million.  The loan matures in June 2019.

 

Acquisitions from Consolidated CMBS Trusts

 

Our Investing and Servicing Segment acquires interests in properties for its REO Portfolio from CMBS trusts, some of which are consolidated as VIEs on our balance sheet.  Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.  During the three months ended June 30, 2017 and 2016, we acquired $19.7 million and $60.5 million, respectively, of net real estate assets from consolidated CMBS trusts. During the six months ended June 30, 2017 and 2016, we acquired $19.7 million and $85.1 million, respectively, of net real estate assets from consolidated CMBS trusts. During the three and six months ended June 30, 2016, we issued non-controlling interests of $2.4 million and $5.5 million, respectively, in connection with these acquisitions.  No non-controlling interests were issued during the six months ended June 30, 2017. Refer to Note 3 for further discussion of these acquisitions. 

 

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

 

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16. Stockholders’ Equity

 

During the six months ended June 30, 2017, our board of directors declared the following dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Declaration Date

    

Record Date

    

Ex-Dividend Date

    

Payment Date

   

Amount

    

Frequency

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

 

During the six months ended June 30, 2017 and 2016, there were no shares issued under our At-The-Market Equity Offering Sales Agreement.  During the six months ended June 30, 2017 and 2016, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.

 

In February 2017, our board of directors extended the term of our $500.0 million common stock and Convertible Note repurchase program through January 2019.  Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further information regarding the repurchase program.  During the six months ended June 30, 2016, we repurchased 1,052,889 shares of common stock for $19.7 million and no Convertible Notes under our repurchase program.  There were no share repurchases or Convertible Note repurchases under the repurchase program during the six months ended June 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 June 30, 2017, we had $262.2 million of remaining capacity to repurchase common stock and/or Convertible Notes under the repurchase program through January 2019.

 

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 2017 Manager Equity Plan during the six months ended June 30, 2017 and 2016 (dollar amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

As of June 30, 2017, there were 11.0 million shares available for future grants under the 2017 Manager Equity Plan and the 2017 Equity Plan.

 

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Schedule of Non-Vested Shares and Share Equivalents (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

(178,136)

 

(195,833)

 

(373,969)

 

 

22.06

Forfeited

 

(34,531)

 

 —

 

(34,531)

 

 

22.56

Balance as of June 30, 2017

 

874,617

 

1,085,417

 

1,960,034

 

 

22.30


(1)

Equity-based award activity for awards granted under the Equity Plan and Non-Executive Director Stock Plan is reflected within the 2017 Equity Plan column, and for awards granted under the Manager Equity Plan, within the 2017 Manager Equity Plan column.

 

 

 

17. Earnings per Share

 

The following table provides a reconciliation of net income and the number of shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

    

2016

    

2017

    

2016

Basic Earnings

 

 

 

 

 

 

 

 

 

 

 

 

Income attributable to STWD common stockholders

 

$

117,380

 

$

111,473

 

$

219,738

 

$

138,130

Less: Income attributable to participating shares

 

 

(828)

 

 

(580)

 

 

(1,728)

 

 

(1,287)

Basic earnings

 

$

116,552

 

$

110,893

 

$

218,010

 

$

136,843

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings

 

 

 

 

 

 

 

 

 

 

 

 

Basic — Income attributable to STWD common stockholders

 

$

117,380

 

$

111,473

 

$

219,738

 

$

138,130

Less: Income attributable to participating shares

 

 

(828)

 

 

(580)

 

 

(1,728)

 

 

(1,287)

Add: Undistributed earnings to participating shares

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Less: Undistributed earnings reallocated to participating shares

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Diluted earnings

 

$

116,552

 

$

110,893

 

$

218,010

 

$

136,843

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares:

 

 

 

 

 

 

 

 

 

 

 

 

Basic — Average shares outstanding

 

 

259,472

 

 

237,060

 

 

259,236

 

 

236,808

Effect of dilutive securities — Convertible Notes

 

 

3,142

 

 

441

 

 

3,128

 

 

456

Effect of dilutive securities — Contingently issuable shares

 

 

96

 

 

70

 

 

96

 

 

70

Effect of dilutive securities — Unvested non-participating shares

 

 

141

 

 

26

 

 

104

 

 

33

Diluted — Average shares outstanding

 

 

262,851

 

 

237,597

 

 

262,564

 

 

237,367

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share Attributable to STWD Common Stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.47

 

$

0.84

 

$

0.58

Diluted

 

$

0.44

 

$

0.47

 

$

0.83

 

$

0.58

 

As of June 30, 2017 and 2016, participating shares of 1.7 million and 1.2 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.

 

Additionally, as of June 30, 2017, there were 61.7 million potential shares of common stock contingently issuable upon the conversion of the Convertible Notes.  The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash.  As a result, this principal amount, representing 58.6 million shares at June 30, 2017, was not included in the computation of diluted EPS.  However, as discussed in Note 10, the conversion

44


 

Table of Contents 

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 $26.0 million and $44.3 million, respectively, at June 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 3.1 million shares for the three and six months ended June 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 $27.0 million and $34.0 million, respectively, at June 30, 2017; therefore, there was no dilutive effect to EPS for the 2017 Notes and 2023 Notes.

 

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 June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2017

 

$

50

 

$

46,775

 

$

(6,758)

 

$

40,067

OCI before reclassifications

 

 

 1

 

 

4,917

 

 

11,005

 

 

15,923

Amounts reclassified from AOCI

 

 

 1

 

 

(10)

 

 

 —

 

 

(9)

Net period OCI

 

 

 2

 

 

4,907

 

 

11,005

 

 

15,914

Balance at June 30, 2017

 

$

52

 

$

51,682

 

$

4,247

 

$

55,981

Three Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2016

 

$

(338)

 

$

33,907

 

$

(112)

 

$

33,457

OCI before reclassifications

 

 

(136)

 

 

5,951

 

 

(6,733)

 

 

(918)

Amounts reclassified from AOCI

 

 

88

 

 

 —

 

 

 —

 

 

88

Net period OCI

 

 

(48)

 

 

5,951

 

 

(6,733)

 

 

(830)

Balance at June 30, 2016

 

$

(386)

 

$

39,858

 

$

(6,845)

 

$

32,627

Six Months Ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

$

(26)

 

$

44,929

 

$

(8,765)

 

$

36,138

OCI before reclassifications

 

 

48

 

 

6,848

 

 

13,012

 

 

19,908

Amounts reclassified from AOCI

 

 

30

 

 

(95)

 

 

 —

 

 

(65)

Net period OCI

 

 

78

 

 

6,753

 

 

13,012

 

 

19,843

Balance at June 30, 2017

 

$

52

 

$

51,682

 

$

4,247

 

$

55,981

Six Months Ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2016

 

$

(65)

 

$

37,307

 

$

(7,513)

 

$

29,729

OCI before reclassifications

 

 

(504)

 

 

2,551

 

 

668

 

 

2,715

Amounts reclassified from AOCI

 

 

183

 

 

 —

 

 

 —

 

 

183

Net period OCI

 

 

(321)

 

 

2,551

 

 

668

 

 

2,898

Balance at June 30, 2016

 

$

(386)

 

$

39,858

 

$

(6,845)

 

$

32,627

 

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Table of Contents 

The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2016 as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts Reclassified from

 

Amounts Reclassified from

 

 

 

 

AOCI during the Three Months

 

AOCI during the Six Months

 

Affected Line Item

 

 

Ended June 30,

 

Ended June 30,

 

in the Statements

Details about AOCI Components

    

2017

    

2016

    

2017

    

2016

    

of Operations

Losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

(1)

 

$

(88)

 

$

(30)

 

$

(183)

 

Interest expense

Unrealized gains on

  available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest realized upon

collection

 

 

10

 

 

 —

 

 

95

 

 

 —

 

Interest income from investment securities

Total reclassifications for the period

 

$

 9

 

$

(88)

 

$

65

 

$

(183)

 

 

 

 

19. Fair Value

 

GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

 

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

 

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

Valuation Process

 

We have valuation control processes in place to validate the fair value of the Company’s financial assets and liabilities measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible.  Refer to Note 20 to the consolidated financial statements included in our Form 10-K for further discussion of our valuation process.

 

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

 

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Fair Value Disclosures

 

The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

    

Total

    

Level I

   

Level II

   

Level III

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale, fair value option

 

$

610,116

 

$

 —

 

$

 —

 

$

610,116

RMBS

 

 

256,397

 

 

 —

 

 

 —

 

 

256,397

CMBS

 

 

13,848

 

 

 —

 

 

 —

 

 

13,848

Equity security

 

 

12,887

 

 

12,887

 

 

 

 

Domestic servicing rights

 

 

38,648

 

 

 

 

 

 

38,648

Derivative assets

 

 

46,078

 

 

 —

 

 

46,078

 

 

 —

VIE assets

 

 

53,902,715

 

 

 —

 

 

 —

 

 

53,902,715

Total 

 

$

54,880,689

 

$

12,887

 

$

46,078

 

$

54,821,724

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

$

8,051

 

$

 —

 

$

8,051

 

$

 —

VIE liabilities

 

 

52,864,038

 

 

 —

 

 

50,699,445

 

 

2,164,593

Total 

 

$

52,872,089

 

$

 —

 

$

50,707,496

 

$

2,164,593

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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The changes in financial assets and liabilities classified as Level III are as follows for the three and six months ended June 30, 2017 and 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Domestic

    

 

 

    

 

 

    

 

 

 

 

Loans

 

 

 

 

 

 

 

Servicing

 

 

 

 

VIE

 

 

 

Three Months Ended June 30, 2017

 

Heldforsale

 

RMBS

 

CMBS

 

Rights

 

VIE Assets

 

Liabilities

 

Total

April 1, 2017 balance

 

$

340,266

 

$

249,419

 

$

15,472

 

$

46,649

 

$

60,185,851

 

$

(2,161,295)

 

$

58,676,362

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value / gain on sale

 

 

15,406

 

 

 —

 

 

(2,343)

 

 

(8,001)

 

 

(5,702,684)

 

 

213,503

 

 

(5,484,119)

OTTI

 

 

 —

 

 

(109)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(109)

Net accretion

 

 

 —

 

 

3,302

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,302

Included in OCI

 

 

 —

 

 

4,907

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,907

Purchases / Originations

 

 

557,068

 

 

7,433

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

564,501

Sales

 

 

(291,182)

 

 

 —

 

 

(700)

 

 

 —

 

 

 —

 

 

 —

 

 

(291,882)

Issuances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,429)

 

 

(5,429)

Cash repayments / receipts

 

 

(11,442)

 

 

(8,555)

 

 

(1,322)

 

 

 —

 

 

 —

 

 

(5,240)

 

 

(26,559)

Transfers into Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(319,457)

 

 

(319,457)

Transfers out of Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

34,288

 

 

34,288

Consolidation of VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Deconsolidation of VIEs

 

 

 —

 

 

 —

 

 

2,741

 

 

 —

 

 

(580,452)

 

 

79,037

 

 

(498,674)

June 30, 2017 balance

 

$

610,116

 

$

256,397

 

$

13,848

 

$

38,648

 

$

53,902,715

 

$

(2,164,593)

 

$

52,657,131

Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2017

 

$

(3,291)

 

$

3,186

 

$

396

 

$

(8,001)

 

$

(5,702,684)

 

$

213,503

 

$

(5,496,891)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Domestic

    

 

 

    

 

 

    

 

 

 

 

Loans

 

 

 

 

 

 

 

Servicing

 

 

 

 

VIE

 

 

 

Three Months Ended June 30, 2016

 

Heldforsale

 

RMBS

 

CMBS

 

Rights

 

VIE Assets

 

Liabilities

 

Total

April 1, 2016 balance

 

$

154,225

 

$

210,898

 

$

96,724

 

$

95,492

 

$

85,115,662

 

$

(3,038,534)

 

$

82,634,467

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value / gain on sale

 

 

13,235

 

 

 —

 

 

1,349

 

 

(12,191)

 

 

(4,250,779)

 

 

57,477

 

 

(4,190,909)

Net accretion

 

 

 —

 

 

3,742

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,742

Included in OCI

 

 

 —

 

 

5,951

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,951

Purchases / Originations

 

 

288,186

 

 

46,866

 

 

24,403

 

 

 —

 

 

 —

 

 

 —

 

 

359,455

Sales

 

 

(218,369)

 

 

 —

 

 

(1,269)

 

 

 —

 

 

 —

 

 

 —

 

 

(219,638)

Cash repayments / receipts

 

 

(171)

 

 

(16,197)

 

 

(7,142)

 

 

 —

 

 

 —

 

 

14,922

 

 

(8,588)

Transfers into Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(557,543)

 

 

(557,543)

Transfers out of Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

35,759

 

 

35,759

Consolidation of VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,746,946

 

 

(53,252)

 

 

1,693,694

Deconsolidation of VIEs

 

 

 —

 

 

 —

 

 

275

 

 

 —

 

 

(2,535,712)

 

 

519

 

 

(2,534,918)

June 30, 2016 balance

 

$

237,106

 

$

251,260

 

$

114,340

 

$

83,301

 

$

80,076,117

 

$

(3,540,652)

 

$

77,221,472

Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2016

 

$

1,810

 

$

3,742

 

$

2,208

 

$

(12,191)

 

$

(4,250,779)

 

$

57,477

 

$

(4,197,733)

 

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Table of Contents 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Domestic

    

 

 

    

 

 

    

 

 

 

 

Loans

 

 

 

 

 

 

 

Servicing

 

 

 

 

VIE

 

 

 

Six Months Ended June 30, 2017

 

Heldforsale

 

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

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value / gain on sale

 

 

25,999

 

 

 —

 

 

(3,686)

 

 

(16,434)

 

 

(12,239,909)

 

 

598,484

 

 

(11,635,546)

OTTI

 

 

 —

 

 

(109)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(109)

Net accretion

 

 

 —

 

 

7,188

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,188

Included in OCI

 

 

 —

 

 

6,753

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

6,753

Purchases / Originations

 

 

1,002,955

 

 

7,433

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,010,388

Sales

 

 

(470,478)

 

 

 —

 

 

(11,134)

 

 

 —

 

 

 —

 

 

 —

 

 

(481,612)

Issuances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(10,188)

 

 

(10,188)

Cash repayments / receipts

 

 

(11,639)

 

 

(18,783)

 

 

(7,088)

 

 

 —

 

 

 —

 

 

(36,036)

 

 

(73,546)

Transfers into Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(383,427)

 

 

(383,427)

Transfers out of Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

163,740

 

 

163,740

Consolidation of VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,127,952

 

 

 —

 

 

1,127,952

Deconsolidation of VIEs

 

 

 —

 

 

 —

 

 

4,210

 

 

 —

 

 

(2,108,589)

 

 

88,203

 

 

(2,016,176)

June 30, 2017 balance

 

$

610,116

 

$

256,397

 

$

13,848

 

$

38,648

 

$

53,902,715

 

$

(2,164,593)

 

$

52,657,131

Amount of total (losses) gains included in earnings attributable to assets still held at June 30, 2017

 

$

(3,291)

 

$

6,973

 

$

228

 

$

(16,434)

 

$

(12,239,909)

 

$

598,484

 

$

(11,653,949)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

Domestic

    

 

 

    

 

 

    

 

 

 

 

Loans

 

 

 

 

 

 

 

Servicing

 

 

 

 

VIE

 

 

 

Six Months Ended June 30, 2016

 

Heldforsale

 

RMBS

 

CMBS

 

Rights

 

VIE Assets

 

Liabilities

 

Total

January 1, 2016 balance

 

$

203,865

 

$

176,224

 

$

212,981

 

$

119,698

 

$

76,675,689

 

$

(2,552,448)

 

$

74,836,009

Impact of ASU 2015-02 adoption (1)

 

 

 —

 

 

 —

 

 

 —

 

 

(17,467)

 

 

17,467

 

 

 —

 

 

 —

Total realized and unrealized gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value / gain on sale

 

 

20,126

 

 

 —

 

 

2,316

 

 

(18,930)

 

 

(8,340,280)

 

 

293,600

 

 

(8,043,168)

Net accretion

 

 

 —

 

 

7,157

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7,157

Included in OCI

 

 

 —

 

 

2,551

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,551

Purchases / Originations

 

 

488,756

 

 

88,336

 

 

57,576

 

 

 —

 

 

 —

 

 

 —

 

 

634,668

Sales

 

 

(475,333)

 

 

 —

 

 

(1,269)

 

 

 —

 

 

 —

 

 

 —

 

 

(476,602)

Issuances

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(596)

 

 

(596)

Cash repayments / receipts

 

 

(308)

 

 

(23,008)

 

 

(19,445)

 

 

 —

 

 

 —

 

 

20,772

 

 

(21,989)

Transfers into Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(972,587)

 

 

(972,587)

Transfers out of Level III

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

146,724

 

 

146,724

Consolidation of VIEs

 

 

 —

 

 

 —

 

 

(138,342)

 

 

 —

 

 

16,850,221

 

 

(483,905)

 

 

16,227,974

Deconsolidation of VIEs

 

 

 —

 

 

 —

 

 

523

 

 

 —

 

 

(5,126,980)

 

 

7,788

 

 

(5,118,669)

June 30, 2016 balance

 

$

237,106

 

$

251,260

 

$

114,340

 

$

83,301

 

$

80,076,117

 

$

(3,540,652)

 

$

77,221,472

Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2016

 

$

1,810

 

$

7,157

 

$

3,778

 

$

(18,930)

 

$

(8,340,280)

 

$

293,600

 

$

(8,052,865)


(1)

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

 

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.

 

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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, 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

 

$

6,211,075

 

$

6,300,054

 

$

5,882,995

 

$

5,934,219

HTM securities

 

 

465,802

 

 

463,279

 

 

509,980

 

 

504,165

Financial liabilities not carried at fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Secured financing agreements and secured borrowings on transferred loans

 

$

4,750,923

 

$

4,739,010

 

$

4,189,126

 

$

4,198,136

Unsecured senior notes

 

 

2,039,086

 

 

2,113,480

 

 

2,011,544

 

 

2,088,374

 

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 as of (1)

 

   

June 30, 2017

   

Technique

   

Input

   

June 30, 2017

   

December 31, 2016

Loans held-for-sale, fair value option

 

$

610,116

 

Discounted cash flow

 

Yield (b)

 

4.5% - 5.8%

 

5.0% - 5.7%

 

 

 

 

 

 

 

Duration (c)

 

2.7 - 12.3 years

 

10.0 years

RMBS

 

 

256,397

 

Discounted cash flow

 

Constant prepayment rate (a)

 

2.6% - 20.5%

 

2.8% - 17.0%

 

 

 

 

 

 

 

Constant default rate (b)

 

0.9% - 5.9%

 

1.1% - 8.1%

 

 

 

 

 

 

 

Loss severity (b)

 

18% - 79% (e)

 

12% - 79% (e)

 

 

 

 

 

 

 

Delinquency rate (c)

 

4% - 32%

 

2% - 29%

 

 

 

 

 

 

 

Servicer advances (a)

 

20% - 83%

 

23% - 94%

 

 

 

 

 

 

 

Annual coupon deterioration (b)

 

0% - 1.0%

 

0% - 0.6%

 

 

 

 

 

 

 

Putback amount per projected total collateral loss (d)

 

0% - 15%

 

0% - 15%

CMBS

 

 

13,848

 

Discounted cash flow

 

Yield (b)

 

0% - 565.0%

 

0% - 172.0%

 

 

 

 

 

 

 

Duration (c)

 

0 - 8.7 years

 

0 - 18.7 years

Domestic servicing rights

 

 

38,648

 

Discounted cash flow

 

Debt yield (a)

 

7.75%

 

7.75%

 

 

 

 

 

 

 

Discount rate (b)

 

15%

 

15%

 

 

 

 

 

 

 

Control migration (b)

 

0% - 80%

 

0% - 80%

VIE assets

 

 

53,902,715

 

Discounted cash flow

 

Yield (b)

 

0% - 587.7%

 

0% - 960.4%

 

 

 

 

 

 

 

Duration (c)

 

0 - 12.6 years

 

0 - 12.0 years

VIE liabilities

 

 

2,164,593

 

Discounted cash flow

 

Yield (b)

 

0% - 587.7%

 

0% - 960.4%

 

 

 

 

 

 

 

Duration (c)

 

0 - 12.6 years

 

0 - 12.0 years


(1)

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

 

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

 

(a)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.

(b)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.

(c)

Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (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)

86% and 57% of the portfolio falls within a range of 45%-80% as of June 30, 2017 and December 31, 2016, respectively.

 

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20.  Income Taxes

 

Certain of our subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code, and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.

 

Our TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing commercial mortgage loans, and investing in entities which engage in real estate related operations. The majority of our TRSs are held within the Investing and Servicing Segment.  As of June 30, 2017 and December 31, 2016, approximately $807.6 million and $634.4 million, respectively, of the Investing and Servicing Segment’s assets, including $81.7 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.

 

The following table is a reconciliation of our U.S. federal income tax determined using our statutory federal tax rate to our reported income tax (benefit) provision for the three and six months ended June 30, 2017 and 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

For the Three Months Ended June 30,

    

For the Six Months Ended June 30,

 

  

2017

 

    

2016

 

    

2017

 

2016

Federal statutory tax rate

 

$

46,439

  

35.0

   

$

39,472

   

35.0

    

$

82,094

 

35.0

 

$

48,971

  

35.0

REIT and other non-taxable income

 

 

(37,000)

 

(27.9)

 

 

(39,171)

 

(34.7)

 

 

(73,425)

 

(31.2)

 

 

(48,135)

 

(34.4)

State income taxes

 

 

20

 

 —

 

 

72

 

0.1

 

 

(119)

 

(0.1)

 

 

(23)

 

 —

Federal benefit of state tax deduction

 

 

(7)

 

 —

 

 

(25)

 

(0.1)

 

 

42

 

 —

 

 

 8

 

 —

Valuation allowance

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

 

 

 —

 

 —

Other

 

 

 —

 

 —

 

 

358

 

0.3

 

 

(123)

 

(0.1)

 

 

(21)

 

 —

Effective tax rate

 

$

9,452

 

7.1

 

$

706

 

0.6

 

$

8,469

 

3.6

 

$

800

 

0.6

 

During the three and six months ended June 30, 2017, we recognized $25.7 million 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 effective tax rate for the three and six months ended June 30, 2017, these earnings were deemed to be both unusual in nature and infrequent in occurrence. As a result, pursuant to ASC 740, the income tax effect of these earnings was excluded from ordinary income and discretely calculated. This calculation resulted in a deferred income tax provision of $9.9 million, which is included within income tax provision in our condensed consolidated statements of operations for the three and six months ended June 30, 2017. 

 

 

21. Commitments and Contingencies

 

As of June 30, 2017, we had future funding commitments on 55 loans totaling $1.6 billion, of which we expect to fund $1.4 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Generally, funding commitments are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are made to the borrower.

 

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.

 

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22.  Segment Data

 

In its operation of the business, management, including our chief operating decision maker, who is our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis prior to the impact of consolidating securitization VIEs under ASC 810. The segment information within this note is reported on that basis.

 

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The table below presents our results of operations for the three months ended June 30, 2017 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

    

Investing

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

and Servicing

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

  

$

116,993

  

$

3,619

  

$

 —

  

$

 —

  

$

120,612

  

$

 —

  

$

120,612

Interest income from investment securities

 

 

11,611

  

 

38,192

 

 

 —

 

 

 —

 

 

49,803

 

 

(37,433)

 

 

12,370

Servicing fees

 

 

216

  

 

33,663

 

 

 —

 

 

 —

 

 

33,879

 

 

(15,251)

 

 

18,628

Rental income

 

 

 —

 

 

12,687

 

 

46,279

 

 

 —

 

 

58,966

 

 

 —

 

 

58,966

Other revenues

 

 

293

 

 

545

 

 

221

 

 

 —

 

 

1,059

 

 

(66)

 

 

993

Total revenues 

 

 

129,113

 

 

88,706

 

 

46,500

 

 

 —

 

 

264,319

 

 

(52,750)

 

 

211,569

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

469

 

 

18

 

 

 —

 

 

24,096

 

 

24,583

 

 

50

 

 

24,633

Interest expense

 

 

24,486

 

 

4,856

 

 

10,899

 

 

31,351

 

 

71,592

 

 

(275)

 

 

71,317

General and administrative

 

 

5,359

 

 

22,789

 

 

1,000

 

 

3,298

 

 

32,446

 

 

74

 

 

32,520

Acquisition and investment pursuit costs

 

 

385

 

 

53

 

 

99

 

 

 —

 

 

537

 

 

 —

 

 

537

Costs of rental operations

 

 

 —

 

 

5,232

 

 

17,792

 

 

 —

 

 

23,024

 

 

 —

 

 

23,024

Depreciation and amortization

 

 

16

 

 

4,737

 

 

17,279

 

 

 —

 

 

22,032

 

 

 —

 

 

22,032

Loan loss allowance, net

 

 

(2,694)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,694)

 

 

 —

 

 

(2,694)

Other expense

 

 

 —

 

 

176

 

 

(34)

 

 

 —

 

 

142

 

 

 —

 

 

142

Total costs and expenses 

 

 

28,021

 

 

37,861

 

 

47,035

 

 

58,745

 

 

171,662

 

 

(151)

 

 

171,511

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

 

 

101,092

 

 

50,845

 

 

(535)

 

 

(58,745)

 

 

92,657

 

 

(52,599)

 

 

40,058

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

77,761

 

 

77,761

Change in fair value of servicing rights

 

 

 —

 

 

(13,667)

 

 

 —

 

 

 —

 

 

(13,667)

 

 

5,666

 

 

(8,001)

Change in fair value of investment securities, net

 

 

(149)

 

 

12,256

 

 

 —

 

 

 —

 

 

12,107

 

 

(14,600)

 

 

(2,493)

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

 

 

(152)

 

 

15,558

 

 

 —

 

 

 —

 

 

15,406

 

 

 —

 

 

15,406

Earnings from unconsolidated entities

 

 

1,230

 

 

35,892

 

 

2,488

 

 

 —

 

 

39,610

 

 

(10,145)

 

 

29,465

(Loss) gain on sale of investments and other assets, net

 

 

(3)

 

 

5,109

 

 

77

 

 

 —

 

 

5,183

 

 

 —

 

 

5,183

Loss on derivative financial instruments, net

 

 

(14,926)

 

 

(2,179)

 

 

(20,481)

 

 

 —

 

 

(37,586)

 

 

 —

 

 

(37,586)

Foreign currency gain, net

 

 

12,882

 

 

11

 

 

17

 

 

 —

 

 

12,910

 

 

 —

 

 

12,910

OTTI

 

 

(109)

 

 

 —

 

 

 —

 

 

 —

 

 

(109)

 

 

 —

 

 

(109)

Other income, net

 

 

 —

 

 

704

 

 

 —

 

 

 —

 

 

704

 

 

(613)

 

 

91

Total other income (loss)

 

 

(1,227)

 

 

53,684

 

 

(17,899)

 

 

 —

 

 

34,558

 

 

58,069

 

 

92,627

Income (loss) before income taxes 

 

 

99,865

 

 

104,529

 

 

(18,434)

 

 

(58,745)

 

 

127,215

 

 

5,470

 

 

132,685

Income tax provision

 

 

(127)

 

 

(9,325)

 

 

 —

 

 

 —

 

 

(9,452)

 

 

 —

 

 

(9,452)

Net income (loss) 

 

 

99,738

 

 

95,204

 

 

(18,434)

 

 

(58,745)

 

 

117,763

 

 

5,470

 

 

123,233

Net income attributable to non-controlling interests

 

 

(353)

 

 

(30)

 

 

 —

 

 

 —

 

 

(383)

 

 

(5,470)

 

 

(5,853)

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

 

$

99,385

 

$

95,174

 

$

(18,434)

 

$

(58,745)

 

$

117,380

 

$

 —

 

$

117,380

 

53


 

Table of Contents 

The table below presents our results of operations for the three months ended June 30, 2016 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

    

Investing

    

 

 

 

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

and Servicing

 

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

 

$

119,296

 

$

3,261

 

$

 —

 

$

 —

 

$

122,557

 

$

 —

 

$

122,557

 

 

Interest income from investment securities

 

 

11,046

 

 

32,435

 

 

 —

 

 

 —

 

 

43,481

 

 

(28,180)

 

 

15,301

 

 

Servicing fees

 

 

206

 

 

37,249

 

 

 —

 

 

 —

 

 

37,455

 

 

(14,143)

 

 

23,312

 

 

Rental income

 

 

 —

 

 

8,223

 

 

29,620

 

 

 —

 

 

37,843

 

 

 —

 

 

37,843

 

 

Other revenues

 

 

58

 

 

1,076

 

 

18

 

 

 —

 

 

1,152

 

 

(173)

 

 

979

 

 

Total revenues 

 

 

130,606

 

 

82,244

 

 

29,638

 

 

 —

 

 

242,488

 

 

(42,496)

 

 

199,992

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

395

 

 

12

 

 

 —

 

 

23,304

 

 

23,711

 

 

56

 

 

23,767

 

 

Interest expense

 

 

22,572

 

 

3,328

 

 

5,678

 

 

26,057

 

 

57,635

 

 

 —

 

 

57,635

 

 

General and administrative

 

 

4,540

 

 

26,721

 

 

837

 

 

3,130

 

 

35,228

 

 

181

 

 

35,409

 

 

Acquisition and investment pursuit costs

 

 

942

 

 

780

 

 

166

 

 

1,000

 

 

2,888

 

 

 —

 

 

2,888

 

 

Costs of rental operations

 

 

 —

 

 

3,661

 

 

12,191

 

 

 —

 

 

15,852

 

 

 —

 

 

15,852

 

 

Depreciation and amortization

 

 

 —

 

 

3,730

 

 

15,343

 

 

 —

 

 

19,073

 

 

 —

 

 

19,073

 

 

Loan loss allowance, net

 

 

2,029

 

 

 —

 

 

 —

 

 

 —

 

 

2,029

 

 

 —

 

 

2,029

 

 

Total costs and expenses 

 

 

30,478

 

 

38,232

 

 

34,215

 

 

53,491

 

 

156,416

 

 

237

 

 

156,653

 

 

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

 

 

100,128

 

 

44,012

 

 

(4,577)

 

 

(53,491)

 

 

86,072

 

 

(42,733)

 

 

43,339

 

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50,707

 

 

50,707

 

 

Change in fair value of servicing rights

 

 

 —

 

 

(11,034)

 

 

 —

 

 

 —

 

 

(11,034)

 

 

(1,157)

 

 

(12,191)

 

 

Change in fair value of investment securities, net

 

 

(30)

 

 

7,459

 

 

 —

 

 

 —

 

 

7,429

 

 

(6,110)

 

 

1,319

 

 

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

 

 

 —

 

 

13,235

 

 

 —

 

 

 —

 

 

13,235

 

 

 —

 

 

13,235

 

 

Earnings from unconsolidated entities

 

 

1,224

 

 

1,286

 

 

2,429

 

 

 —

 

 

4,939

 

 

(460)

 

 

4,479

 

 

Loss on sale of investments and other assets, net

 

 

(90)

 

 

 —

 

 

 —

 

 

 —

 

 

(90)

 

 

 —

 

 

(90)

 

 

Gain (loss) on derivative financial instruments, net

 

 

15,868

 

 

(3,945)

 

 

8,330

 

 

 —

 

 

20,253

 

 

 —

 

 

20,253

 

 

Foreign currency (loss) gain, net

 

 

(17,840)

 

 

870

 

 

(18)

 

 

 —

 

 

(16,988)

 

 

 —

 

 

(16,988)

 

 

Other income, net

 

 

 —

 

 

34

 

 

8,680

 

 

 —

 

 

8,714

 

 

 —

 

 

8,714

 

 

Total other income (loss)

 

 

(868)

 

 

7,905

 

 

19,421

 

 

 —

 

 

26,458

 

 

42,980

 

 

69,438

 

 

Income (loss) before income taxes 

 

 

99,260

 

 

51,917

 

 

14,844

 

 

(53,491)

 

 

112,530

 

 

247

 

 

112,777

 

 

Income tax provision

 

 

 —

 

 

(706)

 

 

 —

 

 

 —

 

 

(706)

 

 

 —

 

 

(706)

 

 

Net income (loss) 

 

 

99,260

 

 

51,211

 

 

14,844

 

 

(53,491)

 

 

111,824

 

 

247

 

 

112,071

 

 

Net income attributable to non-controlling interests

 

 

(348)

 

 

(3)

 

 

 —

 

 

 —

 

 

(351)

 

 

(247)

 

 

(598)

 

 

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

 

$

98,912

 

$

51,208

 

$

14,844

 

$

(53,491)

 

$

111,473

 

$

 —

 

$

111,473

 

 

 

54


 

Table of Contents 

The table below presents our results of operations for the six months ended June 30, 2017 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

    

Investing

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

and Servicing

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

  

$

226,039

  

$

6,456

  

$

 —

  

$

 —

  

$

232,495

  

$

 —

  

$

232,495

Interest income from investment securities

 

 

24,330

  

 

73,028

 

 

 —

 

 

 —

 

 

97,358

 

 

(69,764)

 

 

27,594

Servicing fees

 

 

426

  

 

63,744

 

 

 —

 

 

 —

 

 

64,170

 

 

(31,440)

 

 

32,730

Rental income

 

 

 —

 

 

24,876

 

 

91,132

 

 

 —

 

 

116,008

 

 

 —

 

 

116,008

Other revenues

 

 

372

 

 

1,009

 

 

266

 

 

 —

 

 

1,647

 

 

(185)

 

 

1,462

Total revenues 

 

 

251,167

 

 

169,113

 

 

91,398

 

 

 —

 

 

511,678

 

 

(101,389)

 

 

410,289

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

923

 

 

36

 

 

 —

 

 

47,958

 

 

48,917

 

 

100

 

 

49,017

Interest expense

 

 

44,443

 

 

9,214

 

 

21,106

 

 

62,958

 

 

137,721

 

 

(544)

 

 

137,177

General and administrative

 

 

9,570

 

 

45,369

 

 

2,381

 

 

5,468

 

 

62,788

 

 

161

 

 

62,949

Acquisition and investment pursuit costs

 

 

900

 

 

37

 

 

271

 

 

 —

 

 

1,208

 

 

 —

 

 

1,208

Costs of rental operations

 

 

 —

 

 

10,719

 

 

33,183

 

 

 —

 

 

43,902

 

 

 —

 

 

43,902

Depreciation and amortization

 

 

33

 

 

9,791

 

 

34,436

 

 

 —

 

 

44,260

 

 

 —

 

 

44,260

Loan loss allowance, net

 

 

(2,999)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,999)

 

 

 —

 

 

(2,999)

Other expense

 

 

 —

 

 

934

 

 

(34)

 

 

 —

 

 

900

 

 

 —

 

 

900

Total costs and expenses 

 

 

52,870

 

 

76,100

 

 

91,343

 

 

116,384

 

 

336,697

 

 

(283)

 

 

336,414

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

 

 

198,297

 

 

93,013

 

 

55

 

 

(116,384)

 

 

174,981

 

 

(101,106)

 

 

73,875

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

146,931

 

 

146,931

Change in fair value of servicing rights

 

 

 —

 

 

(23,304)

 

 

 —

 

 

 —

 

 

(23,304)

 

 

6,870

 

 

(16,434)

Change in fair value of investment securities, net

 

 

23

 

 

31,301

 

 

 —

 

 

 —

 

 

31,324

 

 

(34,988)

 

 

(3,664)

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

 

 

(152)

 

 

26,151

 

 

 —

 

 

 —

 

 

25,999

 

 

 —

 

 

25,999

Earnings from unconsolidated entities

 

 

1,700

 

 

36,909

 

 

4,949

 

 

 —

 

 

43,558

 

 

(11,106)

 

 

32,452

(Loss) gain on sale of investments and other assets, net

 

 

(59)

 

 

5,109

 

 

77

 

 

 —

 

 

5,127

 

 

 —

 

 

5,127

Loss on derivative financial instruments, net

 

 

(19,461)

 

 

(1,482)

 

 

(20,992)

 

 

 —

 

 

(41,935)

 

 

 —

 

 

(41,935)

Foreign currency gain, net

 

 

17,745

 

 

12

 

 

17

 

 

 —

 

 

17,774

 

 

 —

 

 

17,774

OTTI

 

 

(109)

 

 

 —

 

 

 —

 

 

 —

 

 

(109)

 

 

 —

 

 

(109)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(5,916)

 

 

(5,916)

 

 

 —

 

 

(5,916)

Other income, net

 

 

 —

 

 

1,069

 

 

 —

 

 

 —

 

 

1,069

 

 

(613)

 

 

456

Total other income (loss)

 

 

(313)

 

 

75,765

 

 

(15,949)

 

 

(5,916)

 

 

53,587

 

 

107,094

 

 

160,681

Income (loss) before income taxes 

 

 

197,984

 

 

168,778

 

 

(15,894)

 

 

(122,300)

 

 

228,568

 

 

5,988

 

 

234,556

Income tax provision

 

 

(342)

 

 

(8,127)

 

 

 —

 

 

 —

 

 

(8,469)

 

 

 —

 

 

(8,469)

Net income (loss) 

 

 

197,642

 

 

160,651

 

 

(15,894)

 

 

(122,300)

 

 

220,099

 

 

5,988

 

 

226,087

Net (income) loss attributable to non-controlling interests

 

 

(707)

 

 

346

 

 

 —

 

 

 —

 

 

(361)

 

 

(5,988)

 

 

(6,349)

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

 

$

196,935

 

$

160,997

 

$

(15,894)

 

$

(122,300)

 

$

219,738

 

$

 —

 

$

219,738

55


 

Table of Contents 

The table below presents our results of operations for the six months ended June 30, 2016 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

    

Investing

    

 

 

 

 

 

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

and Servicing

 

 

 

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income from loans

 

$

233,954

 

$

6,135

 

$

 —

 

$

 —

 

$

240,089

 

$

 —

 

$

240,089

 

 

 

 

Interest income from investment securities

 

 

20,674

 

 

80,061

 

 

 —

 

 

 —

 

 

100,735

 

 

(66,031)

 

 

34,704

 

 

 

 

Servicing fees

 

 

365

 

 

73,467

 

 

 —

 

 

 —

 

 

73,832

 

 

(25,829)

 

 

48,003

 

 

 

 

Rental income

 

 

 —

 

 

14,698

 

 

55,822

 

 

 —

 

 

70,520

 

 

 —

 

 

70,520

 

 

 

 

Other revenues

 

 

81

 

 

2,418

 

 

24

 

 

 —

 

 

2,523

 

 

(354)

 

 

2,169

 

 

 

 

Total revenues 

 

 

255,074

 

 

176,779

 

 

55,846

 

 

 —

 

 

487,699

 

 

(92,214)

 

 

395,485

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management fees

 

 

770

 

 

30

 

 

 —

 

 

47,832

 

 

48,632

 

 

98

 

 

48,730

 

 

 

 

Interest expense

 

 

44,907

 

 

6,566

 

 

10,627

 

 

52,055

 

 

114,155

 

 

 —

 

 

114,155

 

 

 

 

General and administrative

 

 

8,462

 

 

52,015

 

 

1,392

 

 

5,980

 

 

67,849

 

 

358

 

 

68,207

 

 

 

 

Acquisition and investment pursuit costs

 

 

1,280

 

 

1,135

 

 

758

 

 

1,000

 

 

4,173

 

 

 —

 

 

4,173

 

 

 

 

Costs of rental operations

 

 

 —

 

 

6,723

 

 

21,784

 

 

 —

 

 

28,507

 

 

 —

 

 

28,507

 

 

 

 

Depreciation and amortization

 

 

 —

 

 

6,781

 

 

31,052

 

 

 —

 

 

37,833

 

 

 —

 

 

37,833

 

 

 

 

Loan loss allowance, net

 

 

1,268

 

 

 —

 

 

 —

 

 

 —

 

 

1,268

 

 

 —

 

 

1,268

 

 

 

 

Other expense

 

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

100

 

 

 —

 

 

100

 

 

 

 

Total costs and expenses 

 

 

56,687

 

 

73,350

 

 

65,613

 

 

106,867

 

 

302,517

 

 

456

 

 

302,973

 

 

 

 

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

 

 

198,387

 

 

103,429

 

 

(9,767)

 

 

(106,867)

 

 

185,182

 

 

(92,670)

 

 

92,512

 

 

 

 

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net assets related to consolidated VIEs

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

46,540

 

 

46,540

 

 

 

 

Change in fair value of servicing rights

 

 

 —

 

 

(19,704)

 

 

 —

 

 

 —

 

 

(19,704)

 

 

774

 

 

(18,930)

 

 

 

 

Change in fair value of investment securities, net

 

 

(244)

 

 

(44,069)

 

 

 —

 

 

 —

 

 

(44,313)

 

 

46,385

 

 

2,072

 

 

 

 

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

 

 

 —

 

 

20,126

 

 

 —

 

 

 —

 

 

20,126

 

 

 —

 

 

20,126

 

 

 

 

Earnings from unconsolidated entities

 

 

1,692

 

 

2,663

 

 

4,858

 

 

 —

 

 

9,213

 

 

(669)

 

 

8,544

 

 

 

 

Gain on sale of investments and other assets, net

 

 

155

 

 

 —

 

 

 —

 

 

 —

 

 

155

 

 

 —

 

 

155

 

 

 

 

Gain (loss) on derivative financial instruments, net

 

 

12,842

 

 

(15,190)

 

 

(2,117)

 

 

 —

 

 

(4,465)

 

 

 —

 

 

(4,465)

 

 

 

 

Foreign currency (loss) gain, net

 

 

(19,662)

 

 

2,330

 

 

(34)

 

 

 —

 

 

(17,366)

 

 

 —

 

 

(17,366)

 

 

 

 

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

Other income, net

 

 

 —

 

 

77

 

 

9,102

 

 

1,550

 

 

10,729

 

 

 —

 

 

10,729

 

 

 

 

Total other income (loss)

 

 

(5,217)

 

 

(53,767)

 

 

11,809

 

 

1,550

 

 

(45,625)

 

 

93,030

 

 

47,405

 

 

 

 

Income (loss) before income taxes 

 

 

193,170

 

 

49,662

 

 

2,042

 

 

(105,317)

 

 

139,557

 

 

360

 

 

139,917

 

 

 

 

Income tax provision

 

 

(75)

 

 

(725)

 

 

 —

 

 

 —

 

 

(800)

 

 

 —

 

 

(800)

 

 

 

 

Net income (loss) 

 

 

193,095

 

 

48,937

 

 

2,042

 

 

(105,317)

 

 

138,757

 

 

360

 

 

139,117

 

 

 

 

Net (income) loss attributable to non-controlling interests

 

 

(698)

 

 

71

 

 

 —

 

 

 —

 

 

(627)

 

 

(360)

 

 

(987)

 

 

 

 

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

 

$

192,397

 

$

49,008

 

$

2,042

 

$

(105,317)

 

$

138,130

 

$

 —

 

$

138,130

 

 

 

 

 

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The table below presents our condensed consolidated balance sheet as of June 30, 2017 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

    

Investing

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

and Servicing

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Subtotal

 

VIEs

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

664

 

$

36,185

 

$

12,744

 

$

207,719

 

$

257,312

 

$

4,582

 

$

261,894

Restricted cash

 

 

15,573

 

 

14,846

 

 

12,880

 

 

 —

 

 

43,299

 

 

 —

 

 

43,299

Loans held-for-investment, net

 

 

6,207,067

 

 

4,008

 

 

 —

 

 

 —

 

 

6,211,075

 

 

 —

 

 

6,211,075

Loans held-for-sale

 

 

318,634

 

 

291,482

 

 

 —

 

 

 —

 

 

610,116

 

 

 —

 

 

610,116

Investment securities

 

 

735,086

 

 

1,009,151

 

 

 —

 

 

 —

 

 

1,744,237

 

 

(995,303)

 

 

748,934

Properties, net

 

 

 —

 

 

285,190

 

 

1,675,308

 

 

 —

 

 

1,960,498

 

 

 —

 

 

1,960,498

Intangible assets

 

 

 —

 

 

97,727

 

 

121,007

 

 

 —

 

 

218,734

 

 

(27,368)

 

 

191,366

Investment in unconsolidated entities

 

 

31,261

 

 

89,211

 

 

127,795

 

 

 —

 

 

248,267

 

 

(18,728)

 

 

229,539

Goodwill

 

 

 —

 

 

140,437

 

 

 —

 

 

 —

 

 

140,437

 

 

 —

 

 

140,437

Derivative assets

 

 

16,538

 

 

3,372

 

 

26,168

 

 

 —

 

 

46,078

 

 

 —

 

 

46,078

Accrued interest receivable

 

 

32,866

 

 

480

 

 

 —

 

 

 —

 

 

33,346

 

 

 —

 

 

33,346

Other assets

 

 

46,365

 

 

59,345

 

 

58,932

 

 

1,768

 

 

166,410

 

 

(2,762)

 

 

163,648

VIE assets, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

53,902,715

 

 

53,902,715

Total Assets

 

$

7,404,054

 

$

2,031,434

 

$

2,034,834

 

$

209,487

 

$

11,679,809

 

$

52,863,136

 

$

64,542,945

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

23,813

 

$

56,451

 

$

67,088

 

$

23,126

 

$

170,478

 

$

971

 

$

171,449

Related-party payable

 

 

 —

 

 

90

 

 

 —

 

 

22,688

 

 

22,778

 

 

 —

 

 

22,778

Dividends payable

 

 

 —

 

 

 —

 

 

 —

 

 

126,171

 

 

126,171

 

 

 —

 

 

126,171

Derivative liabilities

 

 

6,742

 

 

328

 

 

981

 

 

 —

 

 

8,051

 

 

 —

 

 

8,051

Secured financing agreements, net

 

 

2,700,190

 

 

550,704

 

 

1,227,402

 

 

296,327

 

 

4,774,623

 

 

(23,700)

 

 

4,750,923

Unsecured senior notes, net

 

 

 —

 

 

 —

 

 

 —

 

 

2,039,086

 

 

2,039,086

 

 

 —

 

 

2,039,086

VIE liabilities, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

52,864,038

 

 

52,864,038

Total Liabilities

 

 

2,730,745

 

 

607,573

 

 

1,295,471

 

 

2,507,398

 

 

7,141,187

 

 

52,841,309

 

 

59,982,496

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

2,652

 

 

2,652

 

 

 —

 

 

2,652

Additional paid-in capital

 

 

2,226,923

 

 

861,556

 

 

707,726

 

 

901,292

 

 

4,697,497

 

 

 —

 

 

4,697,497

Treasury stock

 

 

 —

 

 

 —

 

 

 —

 

 

(92,104)

 

 

(92,104)

 

 

 —

 

 

(92,104)

Accumulated other comprehensive income (loss)

 

 

51,734

 

 

(155)

 

 

4,402

 

 

 —

 

 

55,981

 

 

 —

 

 

55,981

Retained earnings (accumulated deficit)

 

 

2,383,738

 

 

551,915

 

 

27,235

 

 

(3,109,751)

 

 

(146,863)

 

 

 —

 

 

(146,863)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,662,395

 

 

1,413,316

 

 

739,363

 

 

(2,297,911)

 

 

4,517,163

 

 

 —

 

 

4,517,163

Non-controlling interests in consolidated subsidiaries

 

 

10,914

 

 

10,545

 

 

 —

 

 

 —

 

 

21,459

 

 

21,827

 

 

43,286

Total Equity

 

 

4,673,309

 

 

1,423,861

 

 

739,363

 

 

(2,297,911)

 

 

4,538,622

 

 

21,827

 

 

4,560,449

Total Liabilities and Equity

 

$

7,404,054

 

$

2,031,434

 

$

2,034,834

 

$

209,487

 

$

11,679,809

 

$

52,863,136

 

$

64,542,945

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

 

    

 

 

    

Investing

    

 

 

 

    

Lending

    

and Servicing

    

Property

 

 

    

 

 

    

and Servicing

    

 

 

 

    

Segment

    

Segment

    

Segment

 

Corporate

    

Subtotal

    

VIEs

    

Total

Assets:

    

 

 

    

 

 

    

 

 

 

 

 

    

 

 

    

 

 

    

 

 

Cash and cash equivalents

    

$

7,085

    

$

38,798

    

$

7,701

    

$

560,790

    

$

614,374

    

$

1,148

    

$

615,522

Restricted cash

 

 

17,885

 

 

8,202

 

 

9,146

 

 

 —

 

 

35,233

 

 

 —

 

 

35,233

Loans held-for-investment, net

 

 

5,827,553

 

 

20,442

 

 

 —

 

 

 —

 

 

5,847,995

 

 

 —

 

 

5,847,995

Loans held-for-sale

 

 

 —

 

 

63,279

 

 

 —

 

 

 —

 

 

63,279

 

 

 —

 

 

63,279

Loans transferred as secured borrowings

 

 

35,000

 

 

 —

 

 

 —

 

 

 —

 

 

35,000

 

 

 —

 

 

35,000

Investment securities

 

 

776,072

 

 

990,570

 

 

 —

 

 

 —

 

 

1,766,642

 

 

(959,024)

 

 

807,618

Properties, net

 

 

 —

 

 

277,612

 

 

1,667,108

 

 

 —

 

 

1,944,720

 

 

 —

 

 

1,944,720

Intangible assets

 

 

 —

 

 

125,327

 

 

128,159

 

 

 —

 

 

253,486

 

 

(34,238)

 

 

219,248

Investment in unconsolidated entities

 

 

30,874

 

 

56,376

 

 

124,977

 

 

 —

 

 

212,227

 

 

(7,622)

 

 

204,605

Goodwill

 

 

 —

 

 

140,437

 

 

 —

 

 

 —

 

 

140,437

 

 

 —

 

 

140,437

Derivative assets

 

 

45,282

 

 

1,186

 

 

42,893

 

 

 —

 

 

89,361

 

 

 —

 

 

89,361

Accrued interest receivable

 

 

25,831

 

 

2,393

 

 

 —

 

 

 —

 

 

28,224

 

 

 —

 

 

28,224

Other assets

 

 

13,470

 

 

59,503

 

 

29,569

 

 

1,866

 

 

104,408

 

 

(2,645)

 

 

101,763

VIE assets, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

67,123,261

 

 

67,123,261

Total Assets

 

$

6,779,052

 

$

1,784,125

 

$

2,009,553

 

$

562,656

 

$

11,135,386

 

$

66,120,880

 

$

77,256,266

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other liabilities

 

$

20,769

 

$

68,603

 

$

81,873

 

$

26,003

 

$

197,248

 

$

886

 

$

198,134

Related-party payable

 

 

 —

 

 

440

 

 

 —

 

 

37,378

 

 

37,818

 

 

 —

 

 

37,818

Dividends payable

 

 

 —

 

 

 —

 

 

 —

 

 

125,075

 

 

125,075

 

 

 —

 

 

125,075

Derivative liabilities

 

 

3,388

 

 

516

 

 

 —

 

 

 —

 

 

3,904

 

 

 —

 

 

3,904

Secured financing agreements, net

 

 

2,258,462

 

 

426,683

 

 

1,196,830

 

 

295,851

 

 

4,177,826

 

 

(23,700)

 

 

4,154,126

Unsecured senior notes, net

 

 

 —

 

 

 —

 

 

 —

 

 

2,011,544

 

 

2,011,544

 

 

 —

 

 

2,011,544

Secured borrowings on transferred loans

 

 

35,000

 

 

 —

 

 

 —

 

 

 —

 

 

35,000

 

 

 —

 

 

35,000

VIE liabilities, at fair value

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

66,130,592

 

 

66,130,592

Total Liabilities

 

 

2,317,619

 

 

496,242

 

 

1,278,703

 

 

2,495,851

 

 

6,588,415

 

 

66,107,778

 

 

72,696,193

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 —

 

 

 —

 

 

 —

 

 

2,639

 

 

2,639

 

 

 —

 

 

2,639

Additional paid-in capital

 

 

2,218,671

 

 

883,761

 

 

696,049

 

 

892,699

 

 

4,691,180

 

 

 —

 

 

4,691,180

Treasury stock

 

 

 —

 

 

 —

 

 

 —

 

 

(92,104)

 

 

(92,104)

 

 

 —

 

 

(92,104)

Accumulated other comprehensive income (loss)

 

 

44,903

 

 

(437)

 

 

(8,328)

 

 

 —

 

 

36,138

 

 

 —

 

 

36,138

Retained earnings (accumulated deficit)

 

 

2,186,727

 

 

390,994

 

 

43,129

 

 

(2,736,429)

 

 

(115,579)

 

 

 —

 

 

(115,579)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

 

4,450,301

 

 

1,274,318

 

 

730,850

 

 

(1,933,195)

 

 

4,522,274

 

 

 —

 

 

4,522,274

Non-controlling interests in consolidated subsidiaries

 

 

11,132

 

 

13,565

 

 

 —

 

 

 —

 

 

24,697

 

 

13,102

 

 

37,799

Total Equity

 

 

4,461,433

 

 

1,287,883

 

 

730,850

 

 

(1,933,195)

 

 

4,546,971

 

 

13,102

 

 

4,560,073

Total Liabilities and Equity

 

$

6,779,052

 

$

1,784,125

 

$

2,009,553

 

$

562,656

 

$

11,135,386

 

$

66,120,880

 

$

77,256,266

 

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23. Subsequent Events

 

Our significant events subsequent to June 30, 2017 were as follows:

 

Federal Home Loan Bank (“FHLB”) Membership

 

In July 2017, we acquired a captive insurance entity that is a member of the FHLB of Chicago.  This membership, which expires in February 2021, provides us additional financing capacity from the FHLB of Chicago on qualifying collateral.

 

Dividend Declaration

 

On August 9, 2017, our board of directors declared a dividend of $0.48 per share for the third quarter of 2017, which is payable on October 13, 2017 to common stockholders of record as of September 29, 2017.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the information included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements.  See “Special Note Regarding Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.

 

Overview

 

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

 

We have three reportable business segments as of June 30, 2017:

 

·

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

 

·

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. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

 

·

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

 

Refer to Note 1 of our condensed consolidated financial statements included herein (the “Condensed Consolidated Financial Statements”) for further discussion of our business and organization.

 

 

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Developments During the Second Quarter of 2017

 

·

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

 

o

$280.0 million first mortgage and mezzanine loan for the refinancing of a 367-room hotel and 11-unit condominium project located in Manhattan’s Lower East Side, of which the Company funded $254.4 million.

 

o

$280.0 million first mortgage loan to finance the development of a 36-floor multi-family tower with parking and ground floor retail space located in Brooklyn, New York, of which the Company funded $30.0 million and sold the unfunded $80.0 million subordinated first mortgage.

 

o

$175.0 million first mortgage loan to finance the completion of a 2.7 million square foot shopping, entertainment and dining complex located in East Rutherford, New Jersey, of which the Company funded $30.0 million.

 

o

$136.1 million first mortgage and mezzanine loan for the acquisition of a 568,000 square foot office tower and parking facility located in Charlotte, North Carolina, of which the Company funded $108.4 million.

 

·

Funded $191.8 million of previously originated loan commitments.

 

·

Received proceeds of $671.3 million from maturities, sales and principal repayments on loans held-for-investment.

 

·

Originated or acquired conduit loans of $416.4 million and received proceeds of $291.2 million from sales.

 

·

Recognized $25.7 million of income before taxes from our investment in an entity which owns equity in an online real estate company.

 

·

Named special servicer on one new issue CMBS transaction with a total unpaid principal balance of $1.1 billion at issuance.

 

·

Acquired commercial real estate from a CMBS trust for a gross purchase price of $19.3 million.

 

·

Sold commercial real estate for total proceeds of $18.6 million and recognized a gain of $5.2 million.

 

 

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Developments During the First Quarter of 2017

 

·

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

 

o

$250.0 million first mortgage and mezzanine loan for the refinancing and renovation of two adjoined 12-floor office buildings located in Washington, D.C., of which the Company funded $135.7 million.

 

o

$223.6 million first mortgage and mezzanine loan for the development of a waterfront residential community located in Glen Cove, New York. The $160.0 million first mortgage was subsequently sold during the quarter.

 

o

$175.0 million first mortgage and mezzanine loan for the acquisition of a portfolio of four office buildings located in Tysons Corner, Virginia, of which the Company funded $171.0 million.

 

o

$100.0 million first mortgage and mezzanine loan for the acquisition of a 23-building predominantly office property located in Alhambra, California, of which the Company funded $84.5 million.

 

o

$73.0 million first mortgage and mezzanine loan for the final stage development of a 347-key full-service hotel and conference center located in Renton, Washington, of which the Company funded $40.0 million.

 

·

Funded $141.6 million of previously originated loan commitments.

 

·

Received proceeds of $268.0 million from maturities, sales and principal repayments on loans held-for-investment.

 

·

Originated or acquired conduit loans of $256.5 million and received proceeds of $179.3 million from sales.

 

·

Purchased one new issue B-piece for $57.4 million, representing the first horizontal risk retention deal.

 

·

Named special servicer on two new issue CMBS transactions, one of which we retained the related B-piece, with a total unpaid principal balance of $1.7 billion at issuance.

 

·

Issued $250.0 million of 4.375% Convertible Senior Notes due 2023 (the “2023 Notes”) and utilized the proceeds to repurchase $230.0 million aggregate principal amount of our 2018 Notes for $250.7 million, recognizing a loss on extinguishment of debt of $5.9 million.

 

Subsequent Events

 

Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to June 30, 2017.

 

 

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Results of Operations

 

The discussion below is based on accounting principles generally accepted in the United States of America (“GAAP”) and therefore reflects the elimination of certain key financial statement line items related to the consolidation of securitization variable interest entities (“VIEs”), particularly within revenues and other income, as discussed in Note 2 to the Condensed Consolidated Financial Statements. For a discussion of our results of operations excluding the impact of Accounting Standards Codification (“ASC”) Topic 810 as it relates to the consolidation of securitization VIEs, refer to the Non-GAAP Financial Measures section herein.

 

The following table compares our summarized results of operations for the three and six months ended June 30, 2017 and 2016 by business segment (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

For the Six Months Ended

 

 

 

 

 

June 30,

 

 

 

 

June 30,

 

 

 

 

   

2017

    

2016

   

$ Change

   

2017

   

2016

   

$ Change

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lending Segment

 

$

129,113

 

$

130,606

 

$

(1,493)

 

$

251,167

 

$

255,074

 

$

(3,907)

Investing and Servicing Segment

 

 

88,706

 

 

82,244

 

 

6,462

 

 

169,113

 

 

176,779

 

 

(7,666)

Property Segment

 

 

46,500

 

 

29,638

 

 

16,862

 

 

91,398

 

 

55,846

 

 

35,552

Investing and Servicing VIEs

 

 

(52,750)

 

 

(42,496)

 

 

(10,254)

 

 

(101,389)

 

 

(92,214)

 

 

(9,175)

 

 

 

211,569

 

 

199,992

 

 

11,577

 

 

410,289

 

 

395,485

 

 

14,804

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lending Segment

 

 

28,021

 

 

30,478

 

 

(2,457)

 

 

52,870

 

 

56,687

 

 

(3,817)

Investing and Servicing Segment

 

 

37,861

 

 

38,232

 

 

(371)

 

 

76,100

 

 

73,350

 

 

2,750

Property Segment

 

 

47,035

 

 

34,215

 

 

12,820

 

 

91,343

 

 

65,613

 

 

25,730

Corporate

 

 

58,745

 

 

53,491

 

 

5,254

 

 

116,384

 

 

106,867

 

 

9,517

Investing and Servicing VIEs

 

 

(151)

 

 

237

 

 

(388)

 

 

(283)

 

 

456

 

 

(739)

 

 

 

171,511

 

 

156,653

 

 

14,858

 

 

336,414

 

 

302,973

 

 

33,441

Other income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lending Segment

 

 

(1,227)

 

 

(868)

 

 

(359)

 

 

(313)

 

 

(5,217)

 

 

4,904

Investing and Servicing Segment

 

 

53,684

 

 

7,905

 

 

45,779

 

 

75,765

 

 

(53,767)

 

 

129,532

Property Segment

 

 

(17,899)

 

 

19,421

 

 

(37,320)

 

 

(15,949)

 

 

11,809

 

 

(27,758)

Corporate

 

 

 —

 

 

 —

 

 

 —

 

 

(5,916)

 

 

1,550

 

 

(7,466)

Investing and Servicing VIEs

 

 

58,069

 

 

42,980

 

 

15,089

 

 

107,094

 

 

93,030

 

 

14,064

 

 

 

92,627

 

 

69,438

 

 

23,189

 

 

160,681

 

 

47,405

 

 

113,276

Income (loss) before income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lending Segment

 

 

99,865

 

 

99,260

 

 

605

 

 

197,984

 

 

193,170

 

 

4,814

Investing and Servicing Segment

 

 

104,529

 

 

51,917

 

 

52,612

 

 

168,778

 

 

49,662

 

 

119,116

Property Segment

 

 

(18,434)

 

 

14,844

 

 

(33,278)

 

 

(15,894)

 

 

2,042

 

 

(17,936)

Corporate

 

 

(58,745)

 

 

(53,491)

 

 

(5,254)

 

 

(122,300)

 

 

(105,317)

 

 

(16,983)

Investing and Servicing VIEs

 

 

5,470

 

 

247

 

 

5,223

 

 

5,988

 

 

360

 

 

5,628

 

 

 

132,685

 

 

112,777

 

 

19,908

 

 

234,556

 

 

139,917

 

 

94,639

Income tax provision

 

 

(9,452)

 

 

(706)

 

 

(8,746)

 

 

(8,469)

 

 

(800)

 

 

(7,669)

Net income attributable to non-controlling interests

 

 

(5,853)

 

 

(598)

 

 

(5,255)

 

 

(6,349)

 

 

(987)

 

 

(5,362)

Net income attributable to Starwood Property Trust, Inc.

 

$

117,380

 

$

111,473

 

$

5,907

 

$

219,738

 

$

138,130

 

$

81,608

 

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Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

 

Lending Segment

 

Revenues

 

For the three months ended June 30, 2017, revenues of our Lending Segment decreased $1.5 million to $129.1 million, compared to $130.6 million for the three months ended June 30, 2016. This decrease was primarily due to (i) a $2.3 million decrease in interest income from loans principally due to lower levels of prepayment related income during the second quarter of 2017 which exceeded the benefits of increases in LIBOR, partially offset by (ii) a $0.6 million increase in interest income principally from CMBS investments.

 

Costs and Expenses

 

For the three months ended June 30, 2017, costs and expenses of our Lending Segment decreased $2.5 million to $28.0 million, compared to $30.5 million for the three months ended June 30, 2016. This decrease was primarily due to a $4.7 million decrease in our loan loss allowance partially offset by a $1.9 million increase in interest expense associated with the various secured financing facilities used to fund a portion of our investment portfolio.  

 

Net Interest Income (amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

 

 

 

June 30,

 

 

 

 

    

2017

    

2016

    

Change

Interest income from loans

 

$

116,993

 

$

119,296

 

$

(2,303)

Interest income from investment securities

 

 

11,611

 

 

11,046

 

 

565

Interest expense

 

 

(24,486)

 

 

(22,572)

 

 

(1,914)

Net interest income

 

$

104,118

 

$

107,770

 

$

(3,652)

 

For the three months ended June 30, 2017, net interest income of our Lending Segment decreased $3.7 million to $104.1 million, compared to $107.8 million for the three months ended June 30, 2016.  This decrease reflects the net decrease in interest income explained in the Revenues discussion above and the increase in interest expense on our secured financing facilities. 

 

During the three months ended June 30, 2017 and 2016, the weighted average unlevered yields on the Lending Segment’s loans and investment securities were 7.0% and 7.2%, respectively. The decrease in the weighted average unlevered yield is primarily due to lower levels of prepayment related income which exceeded the benefits of increases in LIBOR for the three months ended June 30, 2017.

 

During the three months ended June 30, 2017 and 2016, the Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.9% and 3.4%, respectively, and 3.8% and 3.3%, respectively, excluding the impact of bridge financing. The increases in borrowing rates primarily reflect increases in LIBOR.

 

Other Loss

 

For the three months ended June 30, 2017, other loss of our Lending Segment increased $0.3 million to $1.2 million, compared to $0.9 million for the three months ended June 30, 2016. The increase was primarily due to unfavorable changes in the fair value of investments accounted for under the fair value option.  Also, a $30.8 million unfavorable change in gain (loss) on derivatives was mostly offset by a $30.7 million favorable change in foreign currency gain (loss).  The unfavorable change from derivatives reflects a $32.6 million unfavorable change on foreign currency hedges, partially offset by a $1.8 million decreased loss on interest rate swaps.  The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments.  The unfavorable change on the foreign currency hedges and the favorable

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change in foreign currency gain (loss) reflect the overall weakening of the U.S. dollar against the pound sterling (“GBP”) in the second quarter of 2017 versus a strengthening of the U.S. dollar in the second quarter of 2016.  The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. 

 

Investing and Servicing Segment and VIEs

 

Revenues

 

For the three months ended June 30, 2017, revenues of our Investing and Servicing Segment decreased $3.8 million to $35.9 million after consolidated VIE eliminations of $52.8 million, compared to $39.7 million after consolidated VIE eliminations of $42.5 million for the three months ended June 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.  The decrease in revenues in the second quarter of 2017 was primarily due to decreases of $4.7 million in servicing fees and $3.5 million in interest income from CMBS investments, partially offset by a $4.5 million increase in rental income on our expanded REO Portfolio (see Note 3 to the Condensed Consolidated Financial Statements).  The $4.7 million decrease in servicing fees is primarily due to the divestiture of our European servicing and advisory business in October 2016.  The $3.5 million decrease in CMBS interest income reflects a $9.2 million increase in VIE eliminations related to the CMBS trusts we consolidate.  Excluding the effect of these eliminations, CMBS interest income increased by $5.7 million, reflecting a higher level of CMBS interest recoveries from asset liquidations by CMBS trusts.

 

Costs and Expenses

 

For the three months ended June 30, 2017, costs and expenses of our Investing and Servicing Segment decreased $0.8 million to $37.7 million, compared to $38.5 million for the three months ended June 30, 2016, inclusive of VIE eliminations which were nominal for both periods. The decrease in costs and expenses was primarily due to a $4.0 million decrease in general and administrative expenses, principally reflecting the divestiture of our European servicing and advisory business, and a $0.7 million decrease in acquisition related costs.  These decreases were partially offset by increases of $1.6 million in costs of rental operations, $1.3 million in interest expense and $1.0 million in depreciation and amortization, all principally related to our expanded REO portfolio. 

 

Other Income

 

For the three months ended June 30, 2017, other income of our Investing and Servicing Segment increased $60.9 million to $111.8 million including additive net VIE eliminations of $58.1 million, from $50.9 million including additive net VIE eliminations of $43.0 million for the three months ended June 30, 2016.  The increase in other income in the second quarter of 2017 compared to the second quarter of 2016 was primarily due to (i) a $25.7 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), (ii) a $27.1 million increase in the change in value of net assets related to consolidated VIEs, (iii) a $5.1 million gain on a sale of commercial real estate and (iv) a $4.2 million favorable change in the decrease 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.  The change in net assets related to consolidated VIEs reflects amounts associated with the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of the operating results for this segment. Before VIE eliminations, there was an increase in fair value of CMBS securities of $20.3 million and $7.5 million in the three months ended June 30, 2017 and 2016, respectively.

 

Income Tax Provision

 

Historically, our consolidated income tax provision principally relates to the taxable nature of the Investing and Servicing Segment’s loan servicing and loan conduit businesses which are housed in TRSs. For the three months ended June 30, 2017, we had a tax provision of $9.4 million compared to a provision of $0.7 million in the three months ended June 30, 2016. The change primarily reflects an increase in the taxable income of our TRSs associated with earnings

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from our interest in an investor entity which owns equity in an online real estate company (see Notes 7 and 20 to the Condensed Consolidated Financial Statements).

 

Property Segment

 

Revenues

 

For the three months ended June 30, 2017, revenues of our Property Segment increased $16.9 million to $46.5 million, compared to $29.6 million for the three months ended June 30, 2016.  The increase in revenues in the second quarter of 2017 was primarily due to the inclusion of rental income for the Medical Office Portfolio, which was acquired in December 2016 (see Note 3 to the Condensed Consolidated Financial Statements).

 

Costs and Expenses

 

For the three months ended June 30, 2017, costs and expenses of our Property Segment increased $12.8 million to $47.0 million, compared to $34.2 million for the three months ended June 30, 2016. The increase in costs and expenses reflects increases of $1.9 million in depreciation and amortization, $5.6 million in other rental related costs and $5.2 million in interest expense, all primarily due to the inclusion of the Medical Office 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 (see Note 3 to the Condensed Consolidated Financial Statements).

 

Other Income (Loss)

 

For the three months ended June 30, 2017, other income (loss) of our Property Segment decreased $37.3 million to a loss of $17.9 million, compared to income of $19.4 million for the three months ended June 30, 2016. The decrease in other income (loss) was primarily due to (i) a $28.8 million unfavorable change in gain (loss) on derivatives primarily related to foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio (see Note 3 to the Condensed Consolidated Financial Statements) and interest rate swaps which primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio and (ii) the non-recurrence of an $8.4 million bargain purchase gain recognized on the Woodstar Portfolio in the second quarter of 2016.

 

Corporate

 

Costs and Expenses

 

For the three months ended June 30, 2017, corporate expenses increased $5.2 million to $58.7 million, compared to $53.5 million for the three months ended June 30, 2016. The increase was primarily due to interest expense on our 2021 Senior Notes issued in December 2016, partially offset by a decrease in interest expense on our reduced term loan borrowings. 

 

Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

 

Lending Segment

 

Revenues

 

For the six months ended June 30, 2017, revenues of our Lending Segment decreased $3.9 million to $251.2 million, compared to $255.1 million for the six months ended June 30, 2016. This decrease was primarily due to (i) a $7.9 million decrease in interest income from loans principally due to lower levels of prepayment related income during the second quarter of 2017 which exceeded the benefits of increases in LIBOR, partially offset by (ii) a $3.7 million increase in interest income principally from CMBS and RMBS investments.

 

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Costs and Expenses

 

For the six months ended June 30, 2017, costs and expenses of our Lending Segment decreased $3.8 million to $52.9 million, compared to $56.7 million for the six months ended June 30, 2016. This decrease was primarily due to a $4.3 million decrease in our loan loss allowance.  

 

 

Net Interest Income (amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

 

 

 

    

2017

    

2016

    

Change

Interest income from loans

 

$

226,039

 

$

233,954

 

$

(7,915)

Interest income from investment securities

 

 

24,330

 

 

20,674

 

 

3,656

Interest expense

 

 

(44,443)

 

 

(44,907)

 

 

464

Net interest income

 

$

205,926

 

$

209,721

 

$

(3,795)

 

For the six months ended June 30, 2017, net interest income of our Lending Segment decreased $3.8 million to $205.9 million, compared to $209.7 million for the six months ended June 30, 2016.  This decrease reflects the net decrease in interest income explained in the Revenues discussion above, partially offset by a decrease in interest expense on our secured financing facilities. 

 

During the six months ended June 30, 2017 and 2016, the weighted average unlevered yields on the Lending Segment’s loans and investment securities were 7.1% and 7.5%, respectively. The decrease in the weighted average unlevered yield is primarily due to lower levels of prepayment related income which exceeded the benefits of increases in LIBOR for the six months ended June 30, 2017.

 

During the six months ended June 30, 2017 and 2016, the Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.8% and 3.4%, respectively, and 3.6% and 3.3%, respectively, excluding the impact of bridge financing. The increases in borrowing rates primarily reflect increases in LIBOR.

 

Other Loss

 

For the six months ended June 30, 2017, other loss of our Lending Segment decreased $4.9 million to $0.3 million, compared to $5.2 million for the six months ended June 30, 2016. The decrease was primarily due to a $37.4 million favorable change in foreign currency gain (loss), partially offset by a $32.3 million unfavorable change in gain (loss) on derivatives.  The unfavorable change from derivatives reflects a $40.6 million unfavorable change on foreign currency hedges, partially offset by an $8.3 million decreased loss on interest rate swaps.  The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments.  The favorable change in foreign currency gain (loss) and the unfavorable change on the foreign currency hedges reflect the overall weakening of the U.S. dollar against the pound sterling (“GBP”) in the six months of 2017 versus a strengthening of the U.S. dollar in the six months of 2016.  The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. 

 

Investing and Servicing Segment and VIEs

 

Revenues

 

For the six months ended June 30, 2017, revenues of our Investing and Servicing Segment decreased $16.9 million to $67.7 million after consolidated VIE eliminations of $101.4 million, compared to $84.6 million after consolidated VIE eliminations of $92.2 million for the six months ended June 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.  The decrease in revenues in the six months of 2017 was primarily due to

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decreases of $15.3 million in servicing fees and $10.8 million in interest income from CMBS investments, partially offset by a $10.2 million increase in rental income on our expanded REO Portfolio. The $15.3 million decrease in servicing fees is primarily due to the divestiture of our European servicing and advisory business in October 2016 and an increase in VIE eliminations.   The $10.8 million decrease in CMBS interest income reflects a $3.8 million increase in VIE eliminations related to the CMBS trusts we consolidate.  Excluding the effect of these eliminations, CMBS interest income decreased by $7.0 million, reflecting a lower level of CMBS interest recoveries from asset liquidations by CMBS trusts.

 

Costs and Expenses

 

For the six months ended June 30, 2017, costs and expenses of our Investing and Servicing Segment increased $2.0 million to $75.8 million, compared to $73.8 million for the six months ended June 30, 2016, inclusive of VIE eliminations which were nominal for both periods. The increase in costs and expenses was primarily due to increases of $4.0 million in costs of rental operations, $3.0 million in depreciation and amortization and $2.1 million in interest expense, all primarily related to our expanded REO portfolio, partially offset by a $6.8 million decrease in general and administrative expenses principally reflecting the divestiture of our European servicing and advisory business. 

 

Other Income

 

For the six months ended June 30, 2017, other income of our Investing and Servicing Segment increased $143.6 million to $182.9 million including additive net VIE eliminations of $107.1 million, from $39.3 million including additive net VIE eliminations of $93.0 million for the six months ended June 30, 2016.  The increase in other income in the six months ended June 30, 2017 compared to the six months ended June 30, 2016 was primarily due to (i) a $25.7 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), (ii) a $100.4 million increase in the change in value of net assets related to consolidated VIEs and (iii) a $13.7 million decrease in loss on derivatives which principally hedge our interest rate risk on conduit loans. The change in net assets related to consolidated VIEs reflects amounts associated with the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of the operating results for this segment. Before VIE eliminations, there was an increase in fair value of CMBS securities of $40.3 million and a decrease of $44.1 million in the six months ended June 30, 2017 and 2016, respectively.

 

Income Tax Provision

 

Historically, our consolidated income tax provision principally relates to the taxable nature of the Investing and Servicing Segment’s loan servicing and loan conduit businesses which are housed in TRSs. For the six months ended June 30, 2017, we had a tax provision of $8.5 million compared to a provision of $0.8 million in the six months ended June 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 (see Notes 7 and 20 to the Condensed Consolidated Financial Statements).

 

Property Segment

 

Revenues

 

For the six months ended June 30, 2017, revenues of our Property Segment increased $35.6 million to $91.4 million, compared to $55.8 million for the six months ended June 30, 2016.  The increase in revenues in the six months ended June 30, 2017 was primarily due to the full period inclusion of 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.

 

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Costs and Expenses

 

For the six months ended June 30, 2017, costs and expenses of our Property Segment increased $25.7 million to $91.3 million, compared to $65.6 million for the six months ended June 30, 2016. The increase in costs and expenses reflects increases of $3.4 million in depreciation and amortization, $11.4 million in other rental related costs and $10.5 million in interest expense, all primarily due to the full period inclusion of the Medical Office and Woodstar Portfolios, partially offset by lower amortization related to the Woodstar Portfolio’s in-place lease intangible asset, which is now fully amortized.

 

Other Income (Loss)

 

For the six months ended June 30, 2017, other income (loss) of our Property Segment decreased $27.7 million to a loss of $15.9 million, compared to income of $11.8 million for the six months ended June 30, 2016. The decrease in other income (loss) was primarily due to (i) an $18.9 million increased loss on derivatives primarily related 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 and (ii) the non-recurrence of an $8.4 million bargain purchase gain recognized on the Woodstar Portfolio in the second quarter of 2016.

 

Corporate

 

Costs and Expenses

 

For the six months ended June 30, 2017, corporate expenses increased $9.5 million to $116.4 million, compared to $106.9 million for the six months ended June 30, 2016. The increase was primarily due to interest expense on our 2021 Senior Notes issued in December 2016, partially offset by a decrease in interest expense on our reduced term loan borrowings. 

 

Other Income (Loss)

 

For the six months ended June 30, 2017, corporate other loss was $5.9 million, compared to income of $1.5 million for the six months ended June 30, 2016.  Corporate other loss of $5.9 million in the six months ended June 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 $1.5 million for the six months ended June 30, 2016 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; and

(v)

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

 

While there was no change to the definition of Core Earnings during the three months ended June 30, 2017, we deviated from our historical practice of treating the entirety of our income tax provision, including both the current and

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deferred portions, as Core Earnings.  Although the deferred portion of our income tax provision is non-cash, we have historically included it in Core Earnings because it will ultimately become cash, and the amounts have historically not been significant enough to warrant an adjustment to Core Earnings for this timing mismatch.  However, during the three months ended June 30, 2017, we recognized $25.7 million in earnings from unconsolidated entities related to one of our investments, along with a corresponding deferred tax provision of $9.9 million (see Notes 7 and 20 to the Condensed Consolidated Financial Statements).  Pursuant to the criteria in ASC 740 which governs the calculation of the annual effective tax rate for an interim period, the income tax effect of items that are unusual in nature or infrequent in occurrence should be excluded from ordinary income and discretely calculated.  As described in Note 20 to the Condensed Consolidated Financial Statements, the earnings we recognized from our interest in an investor entity which owns equity in an online real estate company qualified for treatment as a discrete item.  Through an analogy to this guidance, and consistent with the definition of Core Earnings which excludes non-cash items, we excluded the $9.9 million deferred tax provision from Core Earnings for the three and six months ended June 30, 2017.  Going forward, we will likewise 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 becomes current. 

 

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 six months ended June 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 other comparable REITs with fewer or no non-cash adjustments and comparison of our own operating results from period to period. Our management uses Core Earnings in this way, and also uses Core Earnings to compute the incentive fee due under our management agreement. The Company believes that its investors also use Core Earnings or a comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers, and as such, the Company believes that the disclosure of Core Earnings is useful to (and expected by) its investors.

 

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

 

In assessing the appropriate weighted average diluted share count to apply to Core Earnings for purposes of determining Core Earnings per share (“EPS”), management considered the following attributes of our current GAAP diluted share methodology: (i) our unvested stock awards representing participating securities were determined to be anti-dilutive and were thus excluded from the denominator of the EPS calculation; and (ii) the portion of the convertible senior notes that are “in-the-money” (referred to as the “conversion spread value”), representing the value that would be delivered to investors in shares upon an assumed conversion, is included in the denominator. Because compensation expense related to unvested stock awards is added back for Core Earnings purposes pursuant to the definition above, there is no dilution to Core Earnings resulting from the associated expense recognition.  As a result, for purposes of determining Core EPS, our GAAP EPS methodology was adjusted to include (instead of exclude) such unvested awards. Further, conversion of the convertible senior notes is an event that is contingent upon numerous factors, none of which are in our control, and is an event that may or may not occur.  Consistent with the treatment of other unrealized adjustments to Core Earnings, our GAAP EPS methodology was adjusted to exclude (instead of include) the conversion spread value in determining Core EPS until a conversion actually occurs. The following table presents our diluted

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weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Core EPS calculation (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

June 30,

 

June 30,

 

    

2017

    

2016

    

2017

    

2016

Diluted weighted average shares - GAAP

 

262,851

 

237,597

 

262,564

 

237,367

Add: Unvested stock awards

 

1,940

 

1,722

 

1,447

 

1,778

Less: Conversion spread value

 

(3,142)

 

(441)

 

(3,128)

 

(456)

Diluted weighted average shares - Core

 

261,649

 

238,878

 

260,883

 

238,689

 

The definition of Core Earnings allows management to make adjustments, subject to the approval of a majority of our independent directors, in situations where such adjustments are considered appropriate in order for Core Earnings to be calculated in a manner consistent with its definition and objective. No adjustments to the definition of Core Earnings occurred during the six months ended June 30, 2017.

 

The following table summarizes our quarterly Core Earnings per weighted average diluted share for the six months ended June 30, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

Core Earnings For the Three-Month Periods Ended

 

   

March 31

    

June 30

2017

 

$

0.51

 

$

0.52

2016

 

 

0.50

 

 

0.50

 

 

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Three Months Ended June 30, 2017 Compared to the Three Months Ended June 30, 2016

 

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended June 30, 2017, by business segment (amounts in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Total

Revenues

 

$

129,113

 

$

88,706

 

$

46,500

 

$

 —

 

$

264,319

Costs and expenses

 

 

(28,021)

 

 

(37,861)

 

 

(47,035)

 

 

(58,745)

 

 

(171,662)

Other income (loss)

 

 

(1,227)

 

 

53,684

 

 

(17,899)

 

 

 —

 

 

34,558

Income (loss) before income taxes

 

 

99,865

 

 

104,529

 

 

(18,434)

 

 

(58,745)

 

 

127,215

Income tax provision

 

 

(127)

 

 

(9,325)

 

 

 —

 

 

 —

 

 

(9,452)

Income attributable to non-controlling interests

 

 

(353)

 

 

(30)

 

 

 —

 

 

 —

 

 

(383)

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

 

 

99,385

 

 

95,174

 

 

(18,434)

 

 

(58,745)

 

 

117,380

Add / (Deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

821

 

 

847

 

 

28

 

 

3,209

 

 

4,905

Management incentive fee

 

 

 —

 

 

 —

 

 

 —

 

 

4,335

 

 

4,335

Acquisition and investment pursuit costs

 

 

 —

 

 

37

 

 

(49)

 

 

 —

 

 

(12)

Depreciation and amortization

 

 

16

 

 

4,367

 

 

17,509

 

 

 —

 

 

21,892

Loan loss allowance, net

 

 

(2,694)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,694)

Interest income adjustment for securities

 

 

(224)

 

 

2,296

 

 

 —

 

 

 —

 

 

2,072

Deferred income tax provision for discrete transactions

 

 

 —

 

 

9,911

 

 

 —

 

 

 —

 

 

9,911

Other non-cash items

 

 

 —

 

 

45

 

 

(589)

 

 

 —

 

 

(544)

Reversal of unrealized (gains) / losses on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

152

 

 

(15,558)

 

 

 —

 

 

 —

 

 

(15,406)

Securities

 

 

258

 

 

(12,256)

 

 

 —

 

 

 —

 

 

(11,998)

Derivatives

 

 

14,482

 

 

1,612

 

 

20,229

 

 

 —

 

 

36,323

Foreign currency

 

 

(12,882)

 

 

(11)

 

 

(17)

 

 

 —

 

 

(12,910)

Earnings from unconsolidated entities

 

 

(1,230)

 

 

(35,892)

 

 

(2,488)

 

 

 —

 

 

(39,610)

Purchases and sales of properties

 

 

 —

 

 

(613)

 

 

 —

 

 

 —

 

 

(613)

Recognition of realized gains / (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

(152)

 

 

18,888

 

 

 —

 

 

 —

 

 

18,736

Securities

 

 

 —

 

 

396

 

 

 —

 

 

 —

 

 

396

Derivatives

 

 

(66)

 

 

(3,069)

 

 

(36)

 

 

(246)

 

 

(3,417)

Foreign currency

 

 

377

 

 

(68)

 

 

16

 

 

 —

 

 

325

Earnings from unconsolidated entities

 

 

1,230

 

 

2,387

 

 

1,791

 

 

 —

 

 

5,408

Purchases and sales of properties

 

 

 —

 

 

2,449

 

 

(153)

 

 

 

 

 

2,296

Core Earnings (Loss)

 

$

99,473

 

$

70,942

 

$

17,807

 

$

(51,447)

 

$

136,775

Core Earnings (Loss) per Weighted Average Diluted Share

 

$

0.38

 

$

0.27

 

$

0.07

 

$

(0.20)

 

$

0.52

 

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended June 30, 2016, by business segment (amounts in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Total

Revenues

 

$

130,606

 

$

82,244

 

$

29,638

 

$

 

$

242,488

Costs and expenses

 

 

(30,478)

 

 

(38,232)

 

 

(34,215)

 

 

(53,491)

 

 

(156,416)

Other income (loss)

 

 

(868)

 

 

7,905

 

 

19,421

 

 

 

 

26,458

Income (loss) before income taxes

 

 

99,260

 

 

51,917

 

 

14,844

 

 

(53,491)

 

 

112,530

Income tax provision

 

 

 

 

(706)

 

 

 

 

 

 

(706)

Income attributable to non-controlling interests

 

 

(348)

 

 

(3)

 

 

 

 

 

 

(351)

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

 

 

98,912

 

 

51,208

 

 

14,844

 

 

(53,491)

 

 

111,473

Add / (Deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

704

 

 

1,401

 

 

29

 

 

5,524

 

 

7,658

Management incentive fee

 

 

 

 

 

 

 

 

2,868

 

 

2,868

Acquisition and investment pursuit costs

 

 

 

 

226

 

 

136

 

 

 

 

362

Depreciation and amortization

 

 

 

 

2,921

 

 

15,369

 

 

 

 

18,290

Loan loss allowance, net

 

 

2,029

 

 

 

 

 

 

 

 

2,029

Interest income adjustment for securities

 

 

(243)

 

 

5,857

 

 

 

 

 

 

5,614

Other non-cash items

 

 

 

 

17

 

 

(800)

 

 

 

 

(783)

Reversal of unrealized (gains) / losses on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 

 

(13,235)

 

 

 

 

 

 

(13,235)

Securities

 

 

30

 

 

(7,459)

 

 

 

 

 

 

(7,429)

Derivatives

 

 

(16,530)

 

 

3,635

 

 

(8,330)

 

 

 

 

(21,225)

Foreign currency

 

 

17,840

 

 

(870)

 

 

18

 

 

 

 

16,988

Earnings from unconsolidated entities

 

 

(1,224)

 

 

(1,286)

 

 

(2,429)

 

 

 

 

(4,939)

Purchases and sales of properties

 

 

 

 

 

 

(8,406)

 

 

 

 

(8,406)

Recognition of realized gains / (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 

 

13,679

 

 

 

 

 

 

13,679

Securities

 

 

 

 

(4,554)

 

 

 

 

 

 

(4,554)

Derivatives

 

 

25,321

 

 

(3,104)

 

 

 

 

 

 

22,217

Foreign currency

 

 

(25,704)

 

 

839

 

 

(19)

 

 

 

 

(24,884)

Earnings from unconsolidated entities

 

 

1,224

 

 

630

 

 

2,333

 

 

 

 

4,187

Core Earnings (Loss)

 

$

102,359

 

$

49,905

 

$

12,745

 

$

(45,099)

 

$

119,910

Core Earnings (Loss) per Weighted Average Diluted Share

 

$

0.43

 

$

0.21

 

$

0.05

 

$

(0.19)

 

$

0.50

 

Lending Segment

 

The Lending Segment’s Core Earnings decreased by $2.9 million, from $102.4 million during the second quarter of 2016 to $99.5 million in the second quarter of 2017. After making adjustments for the calculation of Core Earnings, revenues were $128.9 million, costs and expenses were $29.9 million and other income was $0.9 million.

 

Core revenues, consisting principally of interest income on loans, decreased by $1.5 million in the second quarter of 2017 primarily due to (i) a $2.3 million decrease in interest income from loans principally due to lower levels of prepayment related income during the second quarter of 2017 which exceeded the benefits of increases in LIBOR, partially offset by (ii) a $0.6 million increase in interest income principally from CMBS investments.

 

Core costs and expenses increased by $2.2 million in the second quarter of 2017 primarily due to an increase in interest expense associated with the various secured financing facilities used to fund a portion of our investment portfolio.

 

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Core other income increased by $0.8 million, principally due to a favorable change in foreign currency gain (loss) partially offset by an unfavorable change in gain (loss) on foreign currency derivatives.

 

Investing and Servicing Segment

 

The Investing and Servicing Segment’s Core Earnings increased by $21.0 million, from $49.9 million during the second quarter of 2016 to $70.9 million in the second quarter of 2017.  After making adjustments for the calculation of Core Earnings, revenues were $91.1 million, costs and expenses were $32.7 million, other income was $11.9 million and income tax benefit was $0.6 million.

 

Core revenues increased by $3.0 million in the second quarter of 2017, primarily due to increases of  $4.5 million in rental income on our expanded REO Portfolio and $2.2 million in interest income from our CMBS portfolio, partially offset by a $3.6 million decrease in servicing fees reflecting the divestiture of our European servicing and advisory business in October 2016. 

 

Core costs and expenses decreased by $1.0 million in the second quarter of 2017, primarily due to a $3.4 million decrease in general and administrative expenses reflecting the divestiture of our European servicing and advisory business, partially offset by increases of $1.6 million in costs of rental operations and $1.5 million in interest expense on secured financings for CMBS and the REO Portfolio.

 

Core other income increased by $15.7 million principally due to increases in realized gains on sales of CMBS investments, conduit loans and commercial real estate.

 

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased $1.3 million to a benefit due to a decrease in the taxable income of our TRSs.

 

Property Segment

 

The Property Segment’s Core Earnings increased by $5.1 million, from $12.7 million during the second quarter of 2016 to $17.8 million in the second quarter of 2017. After making adjustments for the calculation of Core Earnings, revenues were $46.1 million, costs and expenses were $29.8 million and other income was $1.5 million.

 

Core revenues increased by $17.2 million in the second quarter of 2017, primarily due to the inclusion of rental income for the Medical Office Portfolio acquired in December 2016.

 

Core costs and expenses increased by $11.1 million in the second quarter of 2017, primarily due to increases in rental related costs of $5.4 million and interest expense of $5.3 million primarily on the secured financing for the Medical Office Portfolio.

 

Core other income decreased by $1.0 million in the second quarter of 2017, primarily due to a decrease in equity in earnings recognized from our investment in the Retail Fund.

 

Corporate

 

Core corporate costs and expenses increased by $6.3 million, from $45.1 million in the second quarter of 2016 to $51.4 million in the second quarter of 2017, primarily due to increases in interest expense of $5.5 million and base management fees of $1.8 million.  

 

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Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016

 

The following table presents our summarized results of operations and reconciliation to Core Earnings for the six months ended June 30, 2017, by business segment (amounts in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Total

Revenues

 

$

251,167

 

$

169,113

 

$

91,398

 

$

 —

 

$

511,678

Costs and expenses

 

 

(52,870)

 

 

(76,100)

 

 

(91,343)

 

 

(116,384)

 

 

(336,697)

Other income (loss)

 

 

(313)

 

 

75,765

 

 

(15,949)

 

 

(5,916)

 

 

53,587

Income (loss) before income taxes

 

 

197,984

 

 

168,778

 

 

(15,894)

 

 

(122,300)

 

 

228,568

Income tax provision

 

 

(342)

 

 

(8,127)

 

 

 —

 

 

 —

 

 

(8,469)

(Income) loss attributable to non-controlling interests

 

 

(707)

 

 

346

 

 

 —

 

 

 —

 

 

(361)

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

 

 

196,935

 

 

160,997

 

 

(15,894)

 

 

(122,300)

 

 

219,738

Add / (Deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

1,570

 

 

1,476

 

 

49

 

 

4,961

 

 

8,056

Management incentive fee

 

 

 —

 

 

 —

 

 

 —

 

 

9,805

 

 

9,805

Acquisition and investment pursuit costs

 

 

 —

 

 

42

 

 

11

 

 

 —

 

 

53

Depreciation and amortization

 

 

33

 

 

8,841

 

 

34,880

 

 

 —

 

 

43,754

Loan loss allowance, net

 

 

(2,999)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,999)

Interest income adjustment for securities

 

 

(472)

 

 

4,365

 

 

 —

 

 

 —

 

 

3,893

Deferred income tax provision for discrete transactions

 

 

 —

 

 

9,911

 

 

 —

 

 

 —

 

 

9,911

Other non-cash items

 

 

 —

 

 

818

 

 

(1,169)

 

 

5,916

 

 

5,565

Reversal of unrealized (gains) / losses on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

152

 

 

(26,151)

 

 

 —

 

 

 —

 

 

(25,999)

Securities

 

 

86

 

 

(31,301)

 

 

 —

 

 

 —

 

 

(31,215)

Derivatives

 

 

18,503

 

 

501

 

 

20,219

 

 

 —

 

 

39,223

Foreign currency

 

 

(17,745)

 

 

(12)

 

 

(17)

 

 

 —

 

 

(17,774)

Earnings from unconsolidated entities

 

 

(1,700)

 

 

(36,909)

 

 

(4,949)

 

 

 —

 

 

(43,558)

Purchases and sales of properties

 

 

 —

 

 

(613)

 

 

 —

 

 

 —

 

 

(613)

Recognition of realized gains / (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

(152)

 

 

29,620

 

 

 —

 

 

 —

 

 

29,468

Securities

 

 

 —

 

 

10,989

 

 

 —

 

 

 —

 

 

10,989

Derivatives

 

 

14,857

 

 

(751)

 

 

122

 

 

(246)

 

 

13,982

Foreign currency

 

 

(13,204)

 

 

(898)

 

 

16

 

 

 —

 

 

(14,086)

Earnings from unconsolidated entities

 

 

1,680

 

 

2,853

 

 

3,563

 

 

 —

 

 

8,096

Purchases and sales of properties

 

 

 —

 

 

2,449

 

 

(153)

 

 

 —

 

 

2,296

Core Earnings (Loss)

 

$

197,544

 

$

136,227

 

$

36,678

 

$

(101,864)

 

$

268,585

Core Earnings (Loss) per Weighted Average Diluted Share

 

$

0.76

 

$

0.52

 

$

0.14

 

$

(0.39)

 

$

1.03

 

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the six months ended June 30, 2016, by business segment (amounts in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Investing

    

 

    

 

    

 

 

 

Lending

 

and Servicing

 

Property

 

 

 

 

 

 

Segment

 

Segment

 

Segment

 

Corporate

 

Total

Revenues

 

$

255,074

 

$

176,779

 

$

55,846

 

$

 —

 

$

487,699

Costs and expenses

 

 

(56,687)

 

 

(73,350)

 

 

(65,613)

 

 

(106,867)

 

 

(302,517)

Other income (loss)

 

 

(5,217)

 

 

(53,767)

 

 

11,809

 

 

1,550

 

 

(45,625)

Income (loss) before income taxes

 

 

193,170

 

 

49,662

 

 

2,042

 

 

(105,317)

 

 

139,557

Income tax provision

 

 

(75)

 

 

(725)

 

 

 —

 

 

 —

 

 

(800)

(Income) loss attributable to non-controlling interests

 

 

(698)

 

 

71

 

 

 —

 

 

 —

 

 

(627)

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

 

 

192,397

 

 

49,008

 

 

2,042

 

 

(105,317)

 

 

138,130

Add / (Deduct):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash equity compensation expense

 

 

1,286

 

 

2,487

 

 

62

 

 

10,907

 

 

14,742

Management incentive fee

 

 

 —

 

 

 —

 

 

 —

 

 

7,467

 

 

7,467

Acquisition and investment pursuit costs

 

 

 —

 

 

815

 

 

694

 

 

 —

 

 

1,509

Depreciation and amortization

 

 

 —

 

 

5,127

 

 

31,089

 

 

 —

 

 

36,216

Loan loss allowance, net

 

 

1,268

 

 

 —

 

 

 —

 

 

 —

 

 

1,268

Interest income adjustment for securities

 

 

(504)

 

 

6,746

 

 

 —

 

 

 —

 

 

6,242

Other non-cash items

 

 

 —

 

 

17

 

 

(2,408)

 

 

 —

 

 

(2,391)

Reversal of unrealized (gains) / losses on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 —

 

 

(20,126)

 

 

 —

 

 

 —

 

 

(20,126)

Securities

 

 

244

 

 

44,069

 

 

 —

 

 

 —

 

 

44,313

Derivatives

 

 

(14,183)

 

 

14,398

 

 

2,117

 

 

 —

 

 

2,332

Foreign currency

 

 

19,662

 

 

(2,330)

 

 

34

 

 

 —

 

 

17,366

Earnings from unconsolidated entities

 

 

(1,692)

 

 

(2,663)

 

 

(4,858)

 

 

 —

 

 

(9,213)

Purchases and sales of properties

 

 

 —

 

 

 —

 

 

(8,406)

 

 

 —

 

 

(8,406)

Recognition of realized gains / (losses) on:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held-for-sale

 

 

 —

 

 

18,471

 

 

 —

 

 

 —

 

 

18,471

Securities

 

 

 —

 

 

(7,877)

 

 

 —

 

 

 —

 

 

(7,877)

Derivatives

 

 

25,875

 

 

(9,816)

 

 

(70)

 

 

 —

 

 

15,989

Foreign currency

 

 

(25,771)

 

 

2,193

 

 

(34)

 

 

 —

 

 

(23,612)

Earnings from unconsolidated entities

 

 

2,296

 

 

1,755

 

 

2,333

 

 

 —

 

 

6,384

Core Earnings (Loss)

 

$

200,878

 

$

102,274

 

$

22,595

 

$

(86,943)

 

$

238,804

Core Earnings (Loss) per Weighted Average Diluted Share

 

$

0.84

 

$

0.43

 

$

0.09

 

$

(0.36)

 

$

1.00

 

Lending Segment

 

The Lending Segment’s Core Earnings decreased by $3.4 million, from $200.9 million during the six months ended June 30, 2016 to $197.5 million during the six months ended June 30, 2017. After making adjustments for the calculation of Core Earnings, revenues were $250.7 million, costs and expenses were $54.3 million and other income was $2.2 million.

 

Core revenues, consisting principally of interest income on loans, decreased by $3.9 million during the six months ended June 30, 2017 primarily due to (i) a $7.9 million decrease in interest income from loans principally due to lower levels of prepayment related income during the second quarter of 2017 which exceeded the benefits of increases in

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LIBOR, partially offset by (ii) a $3.7 million increase in interest income principally from CMBS and RMBS investments.

 

Core costs and expenses increased slightly by $0.1 million during the six months ended June 30, 2017.

 

Core other income increased by $1.0 million, principally due to decreased foreign currency losses partially offset by increased gains on foreign currency derivatives.

 

Investing and Servicing Segment

 

The Investing and Servicing Segment’s Core Earnings increased by $33.9 million, from $102.3 million during the six months ended June 30, 2016 to $136.2 million during the six months ended June 30, 2017.  After making adjustments for the calculation of Core Earnings, revenues were $173.4 million, costs and expenses were $64.9 million, other income was $25.5 million and income tax benefit was $1.8 million.

 

Core revenues decreased by $10.2 million during the six months ended June 30, 2017, primarily due to decreases of $9.7 million in servicing fees reflecting the divestiture of our European servicing and advisory business and $9.4 million in interest income from our CMBS portfolio, partially offset by a $10.1 million increase in rental income on our expanded REO Portfolio. 

 

Core costs and expenses decreased by $0.1 million during the six months ended June 30, 2017, primarily due to a decrease in general and administrative expenses reflecting the divestiture of our European servicing and advisory business, partially offset by increases in costs of rental operations and interest expense on secured financings for CMBS and the REO Portfolio.

 

Core other income increased by $41.2 million principally due to increases in realized gains on sales of CMBS investments, conduit loans and commercial real estate.

 

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased $2.5 million to a benefit due to a decrease in the taxable income of our TRSs.

 

Property Segment

 

The Property Segment’s Core Earnings increased by $14.1 million, from $22.6 million during the six months ended June 30, 2016 to $36.7 million during the six months ended June 30, 2017. After making adjustments for the calculation of Core Earnings, revenues were $90.6 million, costs and expenses were $56.8 million and other income was $2.9 million.

 

Core revenues increased by $37.1 million during the six months ended June 30, 2017, primarily due to the inclusion of a full period of rental income for the Medical Office Portfolio and the Woodstar Portfolio.

 

Core costs and expenses increased by $23.0 million during the six months ended June 30, 2017, primarily due to increases in rental related costs of $11.3 million and interest expense of $10.5 million primarily on the secured financing for the Medical Office Portfolio.

 

Core other income was relatively unchanged during the six months ended June 30, 2017.

 

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Corporate

 

Core corporate costs and expenses increased by $15.0 million, from $86.9 million during the six months ended June 30, 2016 to $101.9 million during the six months ended June 30, 2017, primarily due to increases in interest expense of $11.1 million and base management fees of $3.6 million.

 

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.  Refer to our Form 10-K for a description of these strategies.

 

Cash Flows for the Six Months Ended June 30, 2017 (amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

VIE

    

Excluding Investing

 

 

GAAP

 

Adjustments

 

and Servicing VIEs

Net cash used in operating activities

 

$

(345,037)

 

$

(3,434)

 

$

(348,471)

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

 

Origination and purchase of loans held-for-investment

 

 

(1,228,952)

 

 

 —

 

 

(1,228,952)

Proceeds from principal collections and sale of loans

 

 

906,376

 

 

 —

 

 

906,376

Purchase of investment securities

 

 

(7,433)

 

 

(61,725)

 

 

(69,158)

Proceeds from sales and collections of investment securities

 

 

97,393

 

 

50,693

 

 

148,086

Real estate business combinations, net of cash acquired

 

 

 —

 

 

(19,039)

 

 

(19,039)

Proceeds from sale of properties

 

 

18,256

 

 

 —

 

 

18,256

Net cash flows from other investments and assets

 

 

(38,921)

 

 

 —

 

 

(38,921)

Net cash used in investing activities

 

 

(253,281)

 

 

(30,071)

 

 

(283,352)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

 

Proceeds from borrowings

 

 

2,134,245

 

 

 —

 

 

2,134,245

Principal repayments on and repurchases of borrowings

 

 

(1,590,421)

 

 

 —

 

 

(1,590,421)

Payment of deferred financing costs

 

 

(8,211)

 

 

 —

 

 

(8,211)

Proceeds from common stock issuances, net of offering costs

 

 

(278)

 

 

 —

 

 

(278)

Payment of dividends

 

 

(249,925)

 

 

 —

 

 

(249,925)

Distributions to non-controlling interests

 

 

(3,599)

 

 

 —

 

 

(3,599)

Issuance of debt of consolidated VIEs

 

 

10,188

 

 

(10,188)

 

 

 —

Repayment of debt of consolidated VIEs

 

 

(79,099)

 

 

79,099

 

 

 —

Distributions of cash from consolidated VIEs

 

 

38,840

 

 

(38,840)

 

 

 —

Net cash provided by financing activities

 

 

251,740

 

 

30,071

 

 

281,811

Net decrease in cash, cash equivalents and restricted cash

 

 

(346,578)

 

 

(3,434)

 

 

(350,012)

Cash, cash equivalents and restricted cash, beginning of period

 

 

650,755

 

 

(1,148)

 

 

649,607

Effect of exchange rate changes on cash

 

 

1,016

 

 

 —

 

 

1,016

Cash, cash equivalents and restricted cash, end of period

 

$

305,193

 

$

(4,582)

 

$

300,611

 

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

 

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Cash and cash equivalents decreased by $350.0 million during the six months ended June 30, 2017, reflecting net cash used in operating activities of $348.5 million and net cash used in investing activities of $283.3 million, partially offset by net cash provided by financing activities of $281.8 million.

 

Net cash used in operating activities of $348.5 million for the six months ended June 30, 2017 related primarily to $520.9 million of originations and purchases of loans held-for-sale, net of proceeds from principal collections and sales, cash interest expense of $113.6 million, general and administrative expenses of $48.2 million, management fees of $46.1 million and a net change in operating assets and liabilities of $15.0 million. Offsetting these cash outflows were cash interest income of $174.1 million from our loan origination and conduit programs, plus cash interest income on investment securities of $91.8 million. Net rental income provided cash of $70.4 million and servicing fees provided cash of $59.7 million.

 

Net cash used in investing activities of $283.3 million for the six months ended June 30, 2017 related primarily to the origination and acquisition of new loans held-for-investment of $1.2 billion, the purchase of investment securities of $69.2 million and the purchase of commercial real estate of $19.0 million, partially offset by proceeds received from principal collections and sales of loans of $906.4 million and investment securities of $148.1 million

 

Net cash provided by financing activities of $281.8 million for the six months ended June 30, 2017 related primarily to net borrowings after repayments of our secured and unsecured debt of $535.6 million, partially offset by dividend distributions of $249.9 million. 

 

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Our Investment Portfolio

 

Lending Segment

 

The following table sets forth the amount of each category of investments we owned across various property types within our Lending Segment as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unlevered

 

 

 

    

Face

    

Carrying

  

Asset Specific

 

Net

  

 

  

Return on

 

 

 

 

Amount

 

Value

 

Financing

 

Investment

 

Vintage

 

Asset

 

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgages (1)

 

$

5,322,750

 

$

5,308,741

 

$

2,320,638

 

$

2,988,103

 

1989-2017

 

6.8

%

 

Subordinated mortgages

 

 

287,506

 

 

272,975

 

 

 —

 

 

272,975

 

1998-2015

 

11.7

%

 

Mezzanine loans (1)

 

 

630,296

 

 

630,383

 

 

 —

 

 

630,383

 

2006-2017

 

11.0

%

 

Other loans

 

 

1,757

 

 

1,757

 

 

 —

 

 

1,757

 

2017

 

10.2

%

 

Loans held-for-sale, fair value option

 

 

311,407

 

 

318,634

 

 

 —

 

 

318,634

 

2013-2017

 

5.8

%

 

Loan loss allowance

 

 

 —

 

 

(6,789)

 

 

 —

 

 

(6,789)

 

N/A

 

 

 

 

RMBS

 

 

391,200

 

 

256,397

 

 

67,821

 

 

188,576

 

2003-2007

 

9.7

%

 

HTM securities (2)

 

 

470,549

 

 

465,802

 

 

311,731

 

 

154,071

 

2013-2015

 

5.5

%

 

Equity security

 

 

11,905

 

 

12,887

 

 

 —

 

 

12,887

 

N/A

 

 

 

 

Investments in unconsolidated entities

 

 

N/A

 

 

31,261

 

 

 —

 

 

31,261

 

N/A

 

 

 

 

 

 

$

7,427,370

 

$

7,292,048

 

$

2,700,190

 

$

4,591,858

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $1.1 billion and $964.1 million being classified as first mortgages as of June 30, 2017 and December 31, 2016, respectively.

 

(2)

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

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As of June 30, 2017 and December 31, 2016, our Lending Segment’s investment portfolio, excluding loans held-for-sale, RMBS and other investments, had the following characteristics based on carrying values:

 

 

 

 

 

 

 

Collateral Property Type

    

June 30, 2017

    

December 31, 2016

 

Office

 

33.1

%  

35.8

%

Hospitality

 

21.2

%  

22.9

%

Mixed Use

 

23.1

%  

15.1

%

Multi-family

 

10.5

%  

15.3

%

Retail

 

6.8

%  

7.0

%

Residential

 

3.4

%  

1.9

%

Industrial

 

1.9

%  

2.0

%

 

 

100.0

%  

100.0

%

 

 

 

 

 

 

 

Geographic Location

    

June 30, 2017

    

December 31, 2016

 

North East

 

37.0

%  

37.7

%

West

 

21.0

%  

21.5

%

South East

 

12.8

%  

11.6

%

South West

 

8.2

%  

8.9

%

International

 

9.0

%  

9.5

%

Mid Atlantic

 

6.1

%  

3.5

%

Midwest

 

5.9

%  

7.3

%

 

 

100.0

%  

100.0

%

 

 

 

Investing and Servicing Segment

 

The following table sets forth the amount of each category of investments we owned within our Investing and Servicing Segment as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

   

 

 

    

Asset

   

 

 

 

 

 

Face

 

Carrying

 

Specific

 

Net

 

 

 

Amount

 

Value

 

Financing

 

Investment

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

CMBS, fair value option

 

$

4,130,892

 

$

1,009,151

(1)  

$

179,891

 

$

829,260

 

Intangible assets - servicing rights

 

 

N/A

 

 

66,016

(2)

 

 —

 

 

66,016

 

Lease intangibles, net

 

 

N/A

 

 

25,924

 

 

 —

 

 

25,924

 

Loans held-for-sale, fair value option

 

 

294,732

 

 

291,482

 

 

175,665

 

 

115,817

 

Loans held-for-investment

 

 

4,008

 

 

4,008

 

 

 —

 

 

4,008

 

Investment in unconsolidated entities

 

 

N/A

 

 

89,211

 

 

 —

 

 

89,211

 

Properties, net

 

 

N/A

 

 

285,190

 

 

195,148

 

 

90,042

 

 

 

$

4,429,632

 

$

1,770,982

 

$

550,704

 

$

1,220,278

 

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 $995.3 million and $959.0 million of CMBS reflected in “VIE liabilities” in accordance with ASC 810 as of June 30, 2017 and December 31, 2016, respectively.

 

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(2)

Includes $27.4 million and $34.2 million of servicing rights intangibles reflected in “VIE assets” in accordance with ASC 810 as of June 30, 2017 and December 31, 2016, respectively.

 

Our Investing and Servicing Segment’s REO Portfolio, as defined in Note 3 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $289.9 million and $283.5 million as of June 30, 2017 and December 31, 2016, respectively:

 

 

 

 

 

 

 

Property Type

    

June 30, 2017

    

December 31, 2016

 

Retail

 

43.6

%  

45.8

%

Office

 

29.2

%  

23.9

%

Multi-family

 

15.4

%  

18.1

%

Mixed Use

 

7.2

%  

7.5

%

Self-storage

 

4.6

%  

4.7

%

 

 

100.0

%  

100.0

%

 

 

 

 

 

 

 

Geographic Location

    

June 30, 2017

    

December 31, 2016

 

South East

 

53.1

%  

51.0

%

North East

 

16.7

%  

17.3

%

Mid Atlantic

 

8.9

%  

9.4

%

Midwest

 

7.8

%  

8.0

%

West

 

7.0

%  

7.3

%

South West

 

6.5

%  

7.0

%

 

 

100.0

%  

100.0

%

 

 

 

Property Segment

 

The following table sets forth the amount of each category of investments, which are comprised of properties, intangible lease assets and liabilities and our equity investment in four regional shopping malls (the “Retail Fund”) held within our Property Segment as of June 30, 2017 and December 31, 2016 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

Properties, net

 

$

1,675,308

 

$

1,667,108

Lease intangibles, net

 

 

115,749

 

 

122,124

Investment in unconsolidated entities

 

 

127,795

 

 

124,977

 

 

$

1,918,852

 

$

1,914,209

 

The following table sets forth our net investment and other information regarding the Property Segment’s properties and intangible lease assets and liabilities as of June 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

Asset

    

 

    

 

    

Weighted Average

 

 

Carrying

 

Specific

 

Net

 

Occupancy

 

Remaining

 

 

Value

 

Financing

 

Investment

 

Rate

 

Lease Term

Office—Medical Office Portfolio

 

$

767,959

 

$

487,466

 

$

280,493

 

94.5

%

 

6.2 years

Office—Ireland Portfolio

 

 

495,295

 

 

318,256

 

 

177,039

 

88.8

%

 

9.1 years

Multi-family residential—Ireland Portfolio

 

 

17,947

 

 

11,631

 

 

6,316

 

98.0

%

 

0.2 years

Multi-family residential—Woodstar Portfolio

 

 

611,533

 

 

410,049

 

 

201,484

 

98.4

%

 

0.5 years

Subtotal—undepreciated carrying value

 

 

1,892,734

 

 

1,227,402

 

 

665,332

 

 

 

 

 

Accumulated depreciation and amortization

 

 

(101,677)

 

 

 —

 

 

(101,677)

 

 

 

 

 

Net carrying value

 

$

1,791,057

 

$

1,227,402

 

$

563,655

 

 

 

 

 

 

 

 

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As of June 30, 2017 and December 31, 2016, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:

 

 

 

 

 

 

 

Geographic Location

    

June 30, 2017

    

December 31, 2016

 

Ireland

 

26.7

%  

25.2

%

U.S. Regions:

 

 

 

 

 

South East

 

39.1

%  

39.7

%

North East

 

12.7

%  

13.0

%

South West

 

8.5

%  

8.7

%

West

 

7.0

%  

7.2

%

Midwest

 

6.0

%  

6.2

%

 

 

100.0

%  

100.0

%

 

 

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.

 

Borrowings under Various Secured Financing Arrangements

 

The following table is a summary of our secured financing facilities as of June 30, 2017 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

  

 

    

Pledged

  

 

 

    

 

 

  

Approved

    

 

 

 

 

 

 

 

 

 

 

Asset

 

Maximum

 

 

 

 

but

 

Unallocated

 

 

Current

 

Extended

 

 

 

Carrying

 

Facility

 

Outstanding

 

Undrawn

 

Financing

 

 

Maturity

 

Maturity (a)

 

Pricing

 

Value

 

Size

 

Balance

 

Capacity (b)

 

Amount (c)

Lender 1 Repo 1

 

(d)

 

(d)

 

LIBOR + 1.75% to 5.75%

 

$

1,637,815

 

$

2,000,000

(e)

$

1,196,618

 

$

 —

 

$

803,382

Lender 2 Repo 1

 

Oct 2017

 

Oct 2020

 

LIBOR + 1.75% to 2.75%

 

 

363,744

 

 

500,000

 

 

110,646

 

 

163,496

 

 

225,858

Lender 3 Repo 1

 

May 2018

 

May 2019

 

LIBOR + 2.75% to 3.10%

 

 

110,193

 

 

77,645

 

 

77,645

 

 

 —

 

 

 —

Lender 4 Repo 2

 

Dec 2018

 

Dec 2020

 

LIBOR + 2.00% to 2.50%

 

 

624,738

 

 

1,000,000

(f)

 

230,740

 

 

188,702

 

 

580,558

Lender 6 Repo 1

 

Aug 2019

 

N/A

 

LIBOR + 2.50% to 2.75%

 

 

268,037

 

 

500,000

 

 

210,254

 

 

 —

 

 

289,746

Lender 6 Repo 2

 

Nov 2019

 

Nov 2020

 

GBP LIBOR + 2.75%

 

 

181,171

 

 

126,627

 

 

126,627

 

 

 —

 

 

 —

Lender 9 Repo 1

 

Dec 2017

 

Dec 2018

 

LIBOR + 1.65%

 

 

379,111

 

 

283,575

 

 

283,575

 

 

 —

 

 

 —

Lender 10 Repo 1

 

Mar 2020

 

Mar 2022

 

LIBOR + 2.00% to 2.75%

 

 

169,610

 

 

140,000

 

 

136,800

 

 

 —

 

 

3,200

Lender 11 Repo 1

 

Jun 2019

 

Jun 2020

 

LIBOR + 2.75%

 

 

 —

 

 

200,000

 

 

 —

 

 

 —

 

 

200,000

Lender 7 Secured Financing

 

Jul 2018

 

Jul 2019

 

LIBOR + 2.75%

(g)

 

85,324

 

 

650,000

(h)

 

 —

 

 

 —

 

 

650,000

Lender 8 Secured Financing

 

Aug 2019

 

N/A

 

LIBOR + 4.00%

 

 

49,183

 

 

75,000

 

 

32,124

 

 

 —

 

 

42,876

Conduit Repo 2

 

Nov 2017

 

N/A

 

LIBOR + 2.25%

 

 

138,789

 

 

150,000

 

 

109,070

 

 

 —

 

 

40,930

Conduit Repo 3

 

Feb 2018

 

N/A

 

LIBOR + 2.10%

 

 

 —

 

 

150,000

 

 

 —

 

 

 —

 

 

150,000

Conduit Repo 4

 

Oct 2017

 

Oct 2020

 

LIBOR + 2.25%

 

 

 —

 

 

100,000

 

 

 —

 

 

 —

 

 

100,000

MBS Repo 1

 

(i)

 

(i)

 

LIBOR + 1.90%

 

 

31,250

 

 

20,838

 

 

20,838

 

 

 —

 

 

 —

MBS Repo 2

 

Jun 2020

 

N/A

 

LIBOR/EURIBOR + 2.00% to 2.95%

 

 

344,829

 

 

250,178

 

 

250,178

 

 

 —

 

 

 —

MBS Repo 3

 

(j)

 

(j)

 

LIBOR + 1.32% to 1.95%

 

 

386,771

 

 

256,832

 

 

256,832

 

 

 —

 

 

 —

MBS Repo 4

 

(k)

 

N/A

 

LIBOR + 1.20% to 1.90%

 

 

184,678

 

 

225,000

 

 

32,000

 

 

69,351

 

 

123,649

Investing and Servicing Segment Property Mortgages

 

Feb 2018 to Jun 2026

 

N/A

 

Various

 

 

235,310

 

 

192,596

 

 

172,953

 

 

 —

 

 

19,643

Ireland Portfolio Mortgage

 

May 2020

 

N/A

 

EURIBOR + 1.69%

 

 

477,387

 

 

333,225

 

 

333,225

 

 

 —

 

 

 —

Woodstar Portfolio Mortgages

 

Nov 2025 to Oct 2026

 

N/A

 

3.72% to 3.97%

 

 

371,409

 

 

276,748

 

 

276,748

 

 

 —

 

 

 —

Woodstar Portfolio Government Financing

 

Mar 2026 to Jun 2049

 

N/A

 

1.00% to 5.00%

 

 

310,303

 

 

134,510

 

 

134,510

 

 

 —

 

 

 —

Medical Office Portfolio Mortgages

 

Dec 2021 to Feb 2022

 

Dec 2023 to Feb 2024

 

LIBOR + 2.50%

(l)

 

749,973

 

 

531,815

 

 

497,613

 

 

 —

 

 

34,202

Term Loan A

 

Dec 2020

 

Dec 2021

 

LIBOR + 2.25%

(g)

 

858,717

 

 

300,000

 

 

300,000

 

 

 —

 

 

 —

Revolving Secured Financing

 

Dec 2020

 

Dec 2021

 

LIBOR + 2.25%

(g)

 

 —

 

 

100,000

 

 

 —

 

 

 —

 

 

100,000

 

 

 

 

 

 

 

 

$

7,958,342

 

$

8,574,589

 

 

4,788,996

 

$

421,549

 

$

3,364,044

Unamortized net premium

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,599

 

 

 

 

 

 

Unamortized deferred financing costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,672)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

4,750,923

 

 

 

 

 

 


(a)

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

 

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(b)

Approved but undrawn capacity represents the total draw amount that has been approved by the lender related to those assets that have been pledged as collateral, less the drawn amount.

 

(c)

Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the lender.

 

(d)

Maturity date for borrowings collateralized by loans is September 2018 before extension options and September 2021 assuming the exercise of extension options.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed September 2025.   

 

(e)

The initial maximum facility size of $1.8 billion may be increased to $2.0 billion at our option, subject to certain conditions.

 

(f)

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

 

(g)

Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement.

 

(h)

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

 

(i)

Facility carries a rolling 11 month term which may reset monthly with the lender’s consent not to exceed December 2018.  This facility carries no maximum facility size.  Amount herein reflects the outstanding balance as of June 30, 2017.

 

(j)

Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is June 2018. This facility carries no maximum facility size. Amount herein reflects the outstanding balance as of June 30, 2017.

 

(k)

The date that is 270 days after the buyer delivers notice to seller, subject to a maximum date of May 2018.

 

(l)

Subject to a 25 basis point floor.

 

As of June 30, 2017, Wells Fargo Bank, N.A. is our largest creditor through two repurchase facilities (Lender 1 Repo 1 facility and mortgage-backed securities (“MBS”) Repo 4 facility).

 

Refer to Note 9 of our 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, 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)


(a)

Variance primarily due to the following: (i) $491.2 million drawn on Medical Office Portfolio Mortgages in December 2016; (ii) $300.0 million drawn on the Term Loan A facility in December 2016; and (iii) $283.6 million drawn on the Lender 9 Repo 1 facility in December 2016; partially offset by (iv) $653.2 million pay down of the former Term Loan B facility in December 2016.

 

(b)

Variance primarily due to the following: (i) $336.8 million drawn on the Lender 1 Repo 1 facility in March 2017.

 

(c)

Variance primarily due to the following: (i) $136.8 million drawn on the Lender 10 Repo 1 facility in May 2017; and (ii) $60.0 million drawn on the Lender 4 Repo 2 facility throughout the quarter.

 

Borrowings under Unsecured Senior Notes

 

 

During the three months ended June 30, 2017 and 2016, the weighted average effective borrowing rate on our unsecured senior notes was 5.5% and 5.7%, respectively.  During the six months ended June 30, 2017 and 2016, the weighted average effective borrowing rate on our unsecured senior notes was 5.6% and 5.7%, respectively. The effective borrowing rate includes the effects of underwriter purchase discount and the adjustment for the conversion option on the convertible notes, the initial value of which reduced the balance of the notes.

 

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

 

Scheduled Principal Repayments on Investments and Overhang on Financing Facilities

 

The following scheduled and/or projected principal repayments on our investments were based upon the amounts outstanding and contractual terms of the financing facilities in effect as of June 30, 2017 (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 2017

 

$

697,079

 

$

92,905

 

$

(393,674)

 

$

396,310

 

Fourth Quarter 2017

 

 

900,762

 

 

30,810

 

 

(928,779)

 

 

2,793

 

First Quarter 2018

 

 

508,606

 

 

31,350

 

 

(486,762)

 

 

53,194

 

Second Quarter 2018

 

 

472,754

 

 

36,847

 

 

(336,832)

 

 

172,769

 

Total

 

$

2,579,201

 

$

191,912

 

$

(2,146,047)

 

$

625,066

 

 

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 June 30, 2017, we had 100,000,000 shares of preferred stock available for issuance and 239,445,716 shares of common stock available for issuance.

 

Other Potential Sources of Financing

 

In the future, we may also use other sources of financing to fund the acquisition of our target assets, including other secured as well as unsecured forms of borrowing and sale of certain investment securities which no longer meet our return requirements.

 

Repurchases of Equity Securities and Convertible Senior Notes

 

In September 2014, our board of directors authorized and announced the repurchase of up to $250.0 million of our outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved by our board of directors in December 2014, June 2015, 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 are made in either the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases are discretionary and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.  During the six months ended June 30, 2017, we repurchased $230.0 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 six months ended June 30, 2017, we did not repurchase any common stock under the repurchase program. As of June 30, 2017, we have $262.2 million of remaining capacity to repurchase common stock and/or convertible senior notes under the repurchase program. 

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Off-Balance Sheet Arrangements

 

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

 

Dividends

 

We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to continue to pay regular quarterly dividends to our stockholders in an amount approximating our net taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Refer to our Form 10-K for a detailed dividend history.

 

The Company’s board of directors declared the following dividends during the six months ended June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

Declare Date

    

Record Date

    

Payment Date

    

Amount

    

Frequency

5/9/17

 

6/30/17

 

7/14/17

 

$

0.48

 

Quarterly

2/23/17

 

3/31/17

 

4/14/17

 

$

0.48

 

Quarterly

 

On August 9, 2017, our board of directors declared a dividend of $0.48 per share for the third quarter of 2017, which is payable on October 13, 2017 to common stockholders of record as of September 29, 2017.

 

Leverage Policies

 

Our strategies with regards to use of leverage have not changed significantly since December 31, 2016.  Refer to our Form 10-K for a description of our strategies regarding use of leverage.

 

Contractual Obligations and Commitments

 

Contractual obligations as of June 30, 2017 are as follows (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Less than

    

 

 

    

 

 

    

More than

 

 

 

Total

 

1 year

 

1 to 3 years

 

3 to 5 years

 

5 years

 

Secured financings (a)

 

$

4,788,996

 

$

1,364,181

 

$

1,744,752

 

$

636,012

 

$

1,044,051

 

Unsecured senior notes

 

 

2,073,229

 

 

781,866

 

 

341,363

 

 

700,000

 

 

250,000

 

Loan funding commitments (b)

 

 

1,392,052

 

 

752,088

 

 

600,751

 

 

39,213

 

 

 —

 

Future lease commitments 

 

 

30,483

 

 

6,433

 

 

11,950

 

 

5,558

 

 

6,542

 

Total 

 

$

8,284,760

 

$

2,904,568

 

$

2,698,816

 

$

1,380,783

 

$

1,300,593

 


(a)

Includes available extension options.

 

(b)

Excludes $187.4 million of loan funding commitments in which management projects the Company will not be obligated to fund in the future due to repayments made by the borrower either earlier than, or in excess of, expectations. 

 

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

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Critical Accounting Estimates

 

Refer to the section of our Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for a full discussion of our critical accounting estimates.  Our critical accounting estimates have not materially changed since December 31, 2016.

 

 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

 

We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.  Our strategies for managing risk and our exposure to such risks have not changed materially since December 31, 2016.  Refer to our Form 10-K, Item 7A for further discussion.

 

Credit Risk

 

Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our Manager’s asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

 

We seek to further manage credit risk associated with our Investing and Servicing Segment loans held-for-sale through the purchase of credit index instruments.  The following table presents our credit index instruments as of June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

   

Face Value of

   

Aggregate Notional Value of

  

Number of

 

 

 

Loans Held-for-Sale

 

Credit Index Instruments

 

Credit Index Instruments

 

June 30, 2017

 

$

294,732

 

$

59,000

 

10

 

December 31, 2016

 

$

63,065

 

$

14,000

 

 4

 

 

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

 

Capital Market Risk

 

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

 

Interest Rate Risk

 

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match

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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 June 30, 2017 and December 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

   

 

   

Aggregate Notional

   

 

 

 

 

Face Value of

 

Value of Interest

 

Number of Interest

 

 

 

Hedged Instruments

 

Rate Derivatives

 

Rate Derivatives

 

Instrument hedged as of June 30, 2017

 

 

 

 

 

 

 

 

 

Loans held-for-investment 

 

$

8,000

 

$

8,000

 

 1

 

Loans held-for-sale 

 

 

289,832

 

 

247,600

 

53

 

RMBS, available-for-sale 

 

 

391,200

 

 

69,000

 

 2

 

Secured financing agreements 

 

 

1,044,273

 

 

1,030,226

 

19

 

 

 

$

1,733,305

 

$

1,354,826

 

75

 

Instrument hedged as of December 31, 2016

 

 

 

 

 

 

 

 

 

Loans held-for-investment 

 

$

8,000

 

$

8,000

 

 1

 

Loans held-for-sale 

 

 

63,065

 

 

50,900

 

18

 

RMBS, available-for-sale 

 

 

399,883

 

 

69,000

 

 2

 

Secured financing agreements 

 

 

1,011,067

 

 

1,003,064

 

18

 

 

 

$

1,482,015

 

$

1,130,964

 

39

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Variable-rate

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 

 

$

6,216,707

 

$

180,485

 

$

119,529

 

$

58,728

 

$

(45,344)

Interest expense from variable-rate debt, net of interest rate derivatives

 

 

(2,938,818)

 

 

(94,733)

 

 

(64,943)

 

 

(33,673)

 

 

33,601

Net investment income from variable rate instruments 

 

$

3,277,889

 

$

85,752

 

$

54,586

 

$

25,055

 

$

(11,743)

Impact per diluted shares outstanding

 

 

 

 

$

0.32

 

$

0.21

 

$

0.09

 

$

(0.04)


(1)

Includes the notional value of interest rate derivatives.

 

(2)

Assumes LIBOR does not go below 0%.

 

Foreign Currency Risk

 

We intend to hedge our currency exposures in a prudent manner. However, our currency hedging strategies may not eliminate all of our currency risk due to, among other things, uncertainties in the timing and/or amount of payments received on the related investments, and/or unequal, inaccurate, or unavailable hedges to perfectly offset changes in future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges for the benefit of the hedge counterparty, which could adversely affect our liquidity.

 

Consistent with our strategy of hedging foreign currency exposure on certain investments, we typically enter into a series of forwards to fix the U.S. dollar amount of foreign currency denominated cash flows (interest income, rental income and principal payments) we expect to receive from our foreign currency denominated investments. Accordingly, the notional values and expiration dates of our foreign currency hedges approximate the amounts and timing of future payments we expect to receive on the related investments. 

 

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The following table represents our current currency hedge exposure as it relates to our investments denominated in foreign currencies, along with the aggregate notional amount of the hedges in place (amounts in thousands except for number of contracts, using the June 30, 2017 GBP closing rate of 1.3025, Euro (“EUR”) closing rate of 1.1429, Swedish Krona (“SEK”) closing rate of 0.1187, Norwegian Krone (“NOK”) closing rate of 0.1198 and Danish Krone (“DKK”) closing rate of 0.1537):

 

 

 

 

 

 

 

 

 

 

 

 

Carrying Value of Net Investment

 

Local Currency

 

Number of
Foreign Exchange Contracts

 

Aggregate Notional Value of Hedges Applied

 

Expiration Range of Contracts

$

184,844

 

GBP

 

31

 

$

195,141

 

January 2018

 

19,429

 

GBP

 

78

 

 

22,454

 

July 2017 – June 2019

 

28,969

 

EUR

 

 6

 

 

35,428

 

September 2017 – December 2018

 

2,002

 

EUR, DKK, NOK, SEK

 

 9

 

 

9,045

 

September 2017

 

19,391

 

EUR

 

 6

 

 

23,618

 

August 2017 – November 2018

 

54,544

 

GBP

 

14

 

 

74,765

 

August 2017 – July 2020

 

1,317

 

GBP

 

 1

 

 

1,867

 

March 2018

 

144,162

 

EUR

 

36

(1)

 

267,009

 

September 2017 – June 2020

 

12,887

 

GBP

 

 9

 

 

13,497

 

July 2017 – April 2019

$

467,545

 

 

 

190

 

$

642,824

 

 


(1)

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

 

Item 4.    Controls and Procedures.

 

Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures.

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting.  No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

Currently, no material legal proceedings are pending or, to our knowledge, threatened or contemplated against us, that could have a material adverse effect on our business, financial position or results of operations.

 

Item 1A.    Risk Factors.

 

There have been no material changes to the risk factors previously disclosed in the Form 10-K.

 

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

 

There were no unregistered sales of securities during the three months ended June 30, 2017.

 

Issuer Purchases of Equity Securities

 

There were no purchases of common stock during the three months ended June 30, 2017.

 

Item 3.    Defaults Upon Senior Securities.

 

None.

 

Item 4.    Mine Safety Disclosures.

 

Not applicable.

 

Item 5.    Other Information.

 

None.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

STARWOOD PROPERTY TRUST, INC.

 

 

 

Date: August 9, 2017

By:

/s/ BARRY S. STERNLICHT

 

 

Barry S. Sternlicht
Chief Executive Officer
Principal Executive Officer

 

 

 

Date: August 9, 2017

By:

/s/ RINA PANIRY

 

 

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

 

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Item 6.  Exhibits.

 

(a)Index to Exhibits

 

INDEX TO EXHIBITS

 

 

 

 

Exhibit No.

 

Description

31.1

 

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

 

 

 

31.2

 

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

 

 

 

32.1

 

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

 

 

 

32.2

 

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

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

92