Starwood Property Trust Reports Results for the Quarter and Year Ended December 31, 2014

GREENWICH, Conn., Feb. 25, 2015 /PRNewswire/ -- Starwood Property Trust, Inc. (NYSE: STWD) today announced operating results for the fiscal quarter and year ended December 31, 2014.  The Company's fourth quarter 2014 Core Earnings (a Non-GAAP financial measure) were $112.1 million, or $0.50 per diluted share, and $473.7 million, or $2.17 per diluted share, for full year 2014.

GAAP net income attributable to the Company for the fourth quarter of 2014 was $91.5 million, or $0.40 per diluted share, and $495.0 million, or $2.24 per diluted share, for full year 2014. GAAP net income increased 23% over the $305.0 million, or $1.82 per diluted share, reported for full year 2013.

"2014 was an exceptional year for Starwood Property Trust. We deployed a record $7.4 billion while making continued progress in our asset diversification efforts, and further strengthening our balance sheet. More importantly, our capital was deployed across a broad suite of target investments including large floating rate loans, fixed rate conduit loans, CMBS, and equity investments, both in the U.S. and Europe. We remain highly focused on balancing the risk/reward profile of our investments, as illustrated by a loan-to-value ratio of less than 62% and a history of zero credit losses since our inception over five years ago. We intend to maintain the high credit quality of our assets while continuing to efficiently finance our portfolio" stated Barry Sternlicht, Chairman and Chief Executive Officer of Starwood Property Trust.

Mr. Sternlicht continued, "Going forward we will continue leveraging the global sourcing and investment capabilities of our manager, Starwood Capital Group, in order to identify and underwrite unique investments which fit our risk adjusted return parameters. As we enter our sixth year, Starwood Property Trust remains well positioned to execute on its goal of becoming the premier multi-cylinder finance company which can generate attractive and sustainable total returns for shareholders across various market conditions in an increasingly yield-starved world."

Highlights for the Fourth Quarter 2014 by Business Segment

The Company operates in two reportable segments: Real Estate Lending (the "Lending Segment") and Real Estate Investing and Servicing (the "Investing and Servicing Segment" formerly referred to as the "LNR Segment").  The Single-Family Residential segment, now called Starwood Waypoint Residential Trust (NYSE: SWAY), was spun off to the Company's shareholders on January 31, 2014, and as such, the results of this segment prior to spinoff are included in the year-to-date numbers presented herein.

Real Estate Lending Segment

The Lending Segment represents the Company's commercial real estate finance business.  During the fourth quarter of 2014, the Lending Segment contributed Core Earnings of $75.6 million, or $0.34 per diluted share¹, an increase of over 6% from the $71.0 million, or $0.31 per diluted share, reported for the third quarter of 2014.  GAAP earnings during the fourth quarter of 2014 were $71.5 million, or $0.31 per diluted share, compared to $69.2 million, or $0.31 per diluted share, reported for the third quarter of 2014. 

The Lending Segment originated and/or acquired $1.2 billion of new investments and funded $1.1 billion during the quarter:

• Co-originated a £200.0 million first mortgage for the refinancing of a 17-story office tower located in London, of which the Company holds £138.3 million.
• Originated a $201.0 million first mortgage and mezzanine loan for the acquisition and recapitalization of a 49-story and a 23-story office tower complex located in Chicago, Illinois.
• Originated a $200.0 million first mortgage and mezzanine loan for the acquisition of a mixed use property, which includes office buildings, a sports club and a 294-room hotel located in Dallas/Fort Worth, Texas.
• Committed $150.0 million for a 33% equity interest in a newly formed retail fund established for the purpose of acquiring and operating four leading regional shopping malls located in Florida, Michigan, North Carolina and Virginia.
• Originated a $120.0 million first mortgage and mezzanine loan to refinance two office buildings in New Orleans, Louisiana, one of which includes a new 195-room hotel.
• Originated an $88.7 million first mortgage and mezzanine loan for the acquisition of a 29-story office and retail building in Philadelphia, Pennsylvania.
• Co-originated a $224.5 million first mortgage and $74.8 million mezzanine loan for the refinancing and redevelopment of two office buildings located in New York, New York, of which the Company holds the mezzanine loan and a $6.3 million junior participation in the first mortgage loan.

As of December 31, 2014, 77% of the existing loan portfolio is indexed to LIBOR as is 98% of the Lending Segment's current loan pipeline. In addition, 87% of the floating rate portfolio benefits from having a LIBOR floor at an average rate of 0.35%.  For the 23% of the portfolio that is fixed rate, the weighted average coupon is 8.2%. 

The carrying value of the Lending Segment's total investment portfolio was $6.8 billion as of December 31, 2014, of which $6.4 billion represents its target portfolio.  This portfolio is anticipated to generate a current optimal asset-level return of 10.8% (refer to footnote (4) for a discussion of how this return is computed). 

¹ Annual per share amounts may not equal the sum of each quarter's per share amounts due to rounding and other computational factors.

The following is a summary of the Lending Segment's investments as of December 31, 2014:

Loan-to-Value of Portfolio

The following table reflects the weighted average loan-to-value ("LTV") ratio of the Lending Segment's loan portfolio as of December 31, 2014:

Real Estate Investing and Servicing Segment

The Investing and Servicing Segment includes the Company's U.S. and European servicing businesses, CMBS investment business and conduit loan origination platform. During the fourth quarter of 2014, the Investing and Servicing Segment contributed Core Earnings of $36.5 million, or $0.16 per diluted share, and GAAP earnings of $20.0 million, or $0.09 per diluted share, compared to Core Earnings of $53.9 million, or $0.24 per diluted share, and GAAP earnings of $95.8 million, or $0.42 per diluted share, during the third quarter of 2014. The decline from the third quarter is principally attributable to a decrease in unrealized and realized gains on the CMBS portfolio for GAAP and Core of $59.7 million and $12.7 million, respectively. 

At December 31, 2014, the carrying amount of the Investing and Servicing Segment's principal assets was $1.5 billion and is summarized below: 

Significant activity during the fourth quarter with respect to these assets includes:

• CMBS purchases of $68.9 million, including new issue B-piece purchases of $28.3 million.
• Net decrease in the fair value of the domestic servicing intangible on a GAAP and Core basis of $9.8 million, resulting from the continued amortization of this asset, net of increases in fair value due to the attainment of new servicing contracts.   
• As of December 31, 2014, LNR was special servicer on $13.7 billion of loans and real estate owned ("REO"), shared first place for new issue special servicing assignments during the fourth quarter 2014 and ranked first place for new issue special servicing assignments during the full year 2014.
• The conduit loan business originated $626.4 million of loans and contributed net securitization profits of $15.8 million and $16.5 million on a GAAP and Core basis, respectively.

Financing Activities

As of December 31, 2014, the Company had an aggregate outstanding balance of $4.6 billion and a maximum borrowing capacity of $5.8 billion under its thirteen financing facilities and three convertible senior notes. The Company continues to maintain conservative overall leverage, with a debt-to-equity ratio of 1.2x at the end of the quarter.

During the fourth quarter, the Company:

• Issued $431.3 million of 3.75% Convertible Senior Notes due 2017.
• Upsized our largest repurchase facility's available borrowings from $1.0 billion to $1.25 billion.
• Upsized a repurchase facility from $250.0 million to $500.0 million while amending terms to allow for investment in commercial real estate located in the U.K.
• Extended the maturity dates on three facilities while reducing pricing on one of these facilities.
• Amended an existing $250.0 million share repurchase program to include the repurchase of convertible senior notes.

Interest Rate Sensitivity

The Company's Lending Segment should benefit from a rising rate environment given its high volume of LIBOR-based floating rate loans.  The Company continues to pursue its strategy of financing floating rate investments with floating rate debt and fixed rate investments with either fixed rate debt or floating rate debt hedged by interest swaps. The Company would realize an additional benefit from its fixed rate convertible senior notes, which help limit exposure to rising rates.

The following table summarizes the impact to annual net income from a specified hypothetical change in LIBOR (amounts in millions): 

Additionally, the Company's special servicing revenues would likely benefit from a rising rate environment due to an expected increase in the number of loans that would enter special servicing. 

Book Value and Fair Value Per Share, Net of Minority Interest

The fair value of the Company's net assets at December 31, 2014 was approximately $17.40 per fully diluted share, assuming debt is valued at its par settlement amount, compared to $17.65 per fully diluted share at September 30, 2014. On a fully diluted basis, the Company's GAAP book value at December 31, 2014 was $16.84 per share, compared to $17.06 at September 30, 2014. The changes in fair value and book value per diluted share are principally the result of an additional 2.5 million shares included in the diluted share count as of December 31, 2014 due to the Company's convertible notes moving further "in-the-money." 

Investment Related Activity Subsequent to December 31, 2014

Subsequent to year end, the Lending Segment invested in the following:

• $111.6 million first mortgage and mezzanine loan for the acquisition of a 129-acre office park located in Boca Raton, Florida.
• $73.3 million first mortgage and mezzanine loan for the acquisition of a 367-room full service hotel located in New Orleans, Louisiana.
• $61.6 million first mortgage and mezzanine loan for the acquisition of a 499-room full service hotel located in Indianapolis, Indiana.

Subsequent to year end, the following occurred in the Investing and Servicing Segment:

• Originated conduit loans of $233.5 million.
• Received proceeds of $184.1 million from the securitization of conduit loan inventory.

Investment Capacity

As of February 20, 2015, the Company had approximately $287.4 million of available cash and equivalents, approximately $83.5 million of net equity invested in RMBS that are classified as available-for-sale, $94.4 million of approved but undrawn capacity under existing financing facilities and $390.9 million of unallocated warehouse capacity. In addition, the Company expects to receive $450.3 million during the first quarter from expected maturities, prepayments, sales and participations. These liquidity sources provide the Company with the capacity to acquire or originate up to $1.1 billion of new investments. 

Dividend

On February 25, 2015, the Company's Board of Directors declared a dividend of $0.48 per share of common stock for the quarter ending March 31, 2015.  The dividend is payable on April 15, 2015 to common shareholders of record as of March 31, 2015.  During the full year 2014, the Company declared cash dividends of $1.92 per share compared to Core Earnings per diluted share of $2.17.

2015 Initial Guidance

For 2015, the Company is estimating its Core Earnings in the range of $2.05 to $2.25 per diluted share.  This guidance reflects the Company's estimates on the (i) yield on existing investments; (ii) yield on incremental investments inclusive of the Company's existing pipeline; (iii) amount and timing of debt and equity capital deployment to fund new investments; (iv) costs of additional debt and equity capital to fund new investments; (v) pace of amortization of the servicing intangible based on the amount and timing of servicing fees on existing contracts; (vi) taxation associated with the TRSs, particularly the Investing and Servicing TRSs, which house this segment's servicing and conduit loan operations, both of which generate significant taxable income; and (vii) changes in costs and expenses reflective of the Company's forecasted operations.  This guidance does not reflect any impact which may result from repurchases of equity or convertible debt securities pursuant to the Company's existing repurchase program.  All guidance is based on current expectations of future economic conditions, the dynamics of the commercial real estate markets in which it operates and the judgment of the Company's management team. 

Supplemental Schedules

The Company has published supplemental earnings schedules in order to provide additional disclosure and financial information for the benefit of the Company's stakeholders.  These can be found at the Company's website in the Investor Relations section under "Financial Information".

Conference Call and Webcast Information 

The Company will host a webcast and conference call on Wednesday, February 25, 2015 at 10:00 a.m. Eastern Time to discuss fourth quarter financial results and recent events.  A webcast will be available on the Company's website at www.starwoodpropertytrust.com.  To listen to a live broadcast, access the site at least 15 minutes prior to the scheduled start time in order to register and download and install any necessary audio software.

To Participate in the Telephone Conference Call:

Dial in at least 15 minutes prior to start time.

Domestic:  1-888-572-7034
International:  1-719-457-2697

Conference Call Playback:
Domestic:  1-877-870-5176
International:  1-858-384-5517
Passcode:  6199106

The playback can be accessed through March 11, 2015

About Starwood Property Trust, Inc.

Starwood Property Trust (NYSE: STWD), an affiliate of global private investment firm Starwood Capital Group, is the largest commercial mortgage real estate investment trust in the United States. The Company's core business focuses on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments. Through its subsidiaries LNR Property, LLC and Hatfield Philips International, Starwood Property Trust also operates as the largest commercial mortgage special servicer in the United States and one of the largest primary and special servicers in Europe. With total capital deployed since inception of approximately $17.0 billion, Starwood Property Trust continues to solidify its position as one of the premier real estate finance companies in the country.

Forward Looking Statements

Statements in this press release which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Although Starwood Property Trust, Inc. believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be attained.   Factors that could cause actual results to differ materially from the Company's expectations include completion of pending investments, continued ability to acquire additional investments, competition within the finance and real estate industries, economic conditions, availability of financing and other risks detailed from time to time in the Company's reports filed with the SEC.

Definition of Core Earnings

Core Earnings, a non-GAAP financial measure, is used to compute the Company's incentive fees to its external manager and is an appropriate supplemental disclosure for a mortgage REIT.  For the Company's purposes, Core Earnings is defined as GAAP net income (loss) excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization of real estate (to the extent that the Company owns properties), 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. The amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash adjustments as determined by the Company's external manager and approved by a majority of the Company's independent directors. 

Additional information can be found on the Company's website at www.starwoodpropertytrust.com

Contact: 
Zachary Tanenbaum
Starwood Property Trust 
Phone: 203-422-7788 
Email: [email protected]

SOURCE Starwood Property Trust, Inc.

Related Links

http://www.starwoodpropertytrust.com