Starwood Property Trust(STWD) - 2025 Q2 - Quarterly Report

Part I Financial Information Financial Statements This section presents Starwood Property Trust, Inc.'s unaudited Condensed Consolidated Financial Statements as of June 30, 2025, including Balance Sheets, Statements of Operations, Comprehensive Income, Equity, and Cash Flows, along with detailed notes on accounting policies and financial activities Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $62,369,363 | $62,556,497 | | Loans held-for-investment, net | $17,825,386 | $15,437,013 | | VIE assets, at fair value | $36,522,250 | $38,937,576 | | Total Liabilities | $55,200,633 | $55,363,025 | | Secured financing agreements, net | $13,540,389 | $11,151,557 | | VIE liabilities, at fair value | $34,902,530 | $37,288,545 | | Total Starwood Property Trust, Inc. Stockholders' Equity | $6,422,210 | $6,437,107 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $444,283 | $489,826 | $862,463 | $1,012,914 | | Net income | $134,696 | $77,725 | $250,797 | $237,585 | | Net income attributable to Starwood Property Trust, Inc. | $129,814 | $77,890 | $242,069 | $232,222 | | Diluted EPS | $0.38 | $0.24 | $0.71 | $0.73 | Note 1: Business and Organization Starwood Property Trust, Inc. is a REIT externally managed by Starwood Capital Group, primarily focused on originating, acquiring, financing, and managing mortgage loans and other real estate investments across the U.S., Europe, and Australia through its four reportable business segments - The company operates through four primary business segments[32][35] - Commercial and Residential Lending: Originates and manages commercial first mortgages, non-agency residential mortgages, CMBS, RMBS, and other real estate debt[35] - Infrastructure Lending: Originates and manages infrastructure debt investments[35] - Property Segment: Acquires and manages equity interests in stabilized commercial real estate, including multifamily properties[35] - Investing and Servicing Segment: Includes a servicing business, an investment business in CMBS, a conduit loan origination business, and a commercial real estate asset investment business[35] Note 2: Summary of Significant Accounting Policies This note details the company's significant accounting policies, emphasizing VIE consolidation, fair value option application, the CECL model for credit losses, and revenue recognition methods for interest, servicing, and rental income - The company consolidates securitization VIEs where it is the primary beneficiary, resulting in the gross presentation of VIE assets and liabilities on the balance sheet, with assets restricted to settling the VIEs' obligations[37][44][49] - The fair value option is elected for certain financial assets and liabilities, including those of consolidated securitization VIEs and loans held-for-sale, to mitigate accounting mismatches and reflect short-term holding periods[59] - The company uses a Current Expected Credit Loss (CECL) model for estimating future credit losses on financial instruments measured at amortized cost, such as HFI loans and HTM debt securities, utilizing historical industry loss data from third-party services as a benchmark[66][67] Note 3: Acquisitions and Divestitures During H1 2025, the company sold an office building for $60.0 million (net gain $4.1 million) and an equity interest for $70.0 million (gain $51.4 million), following the prior year's sale of a 16-property Master Lease Portfolio for $387.1 million (gain $92.0 million) - In H1 2025, sold an office building in Texas for $60.0 million, recognizing a net gain of $4.1 million[93] - In H1 2025, sold an equity interest for gross proceeds of $70.0 million, resulting in a gain of $51.4 million[94] - On February 29, 2024, sold the 16-property Master Lease Portfolio for a gross price of $387.1 million, recognizing a gain of $92.0 million[96] Note 4: Loans As of June 30, 2025, total net loans increased to $20.3 billion from $18.0 billion at year-end 2024, driven by commercial and infrastructure loan growth, while the credit loss allowance decreased to $417.3 million from $448.3 million, with a net credit loss reversal of $19.3 million for H1 2025, and three properties foreclosed with a combined loan value of $184.6 million Loan Portfolio Summary (in thousands) | Loan Category | Carrying Value (June 30, 2025) | Carrying Value (Dec 31, 2024) | | :--- | :--- | :--- | | Loans held-for-investment | | | | Commercial loans | $15,168,392 | $13,331,876 | | Infrastructure first priority loans | $3,074,314 | $2,553,432 | | Loans held-for-sale | | | | Residential, fair value option | $2,323,276 | $2,394,624 | | Commercial, fair value option | $171,562 | $121,384 | | Total gross loans | $20,737,544 | $18,401,316 | | Credit loss allowances | ($417,320) | ($448,295) | | Total net loans | $20,320,224 | $17,953,021 | Credit Loss Allowance Activity - Funded Loans (in thousands) | Period | Beginning Balance | Credit loss (reversal) provision, net | Charge-offs | Ending Balance | | :--- | :--- | :--- | :--- | :--- | | Six Months Ended June 30, 2025 | $448,295 | ($13,750) | ($17,225) | $417,320 | - During H1 2025, the company foreclosed on or obtained control of collateral for three loans with a total carrying value of $184.6 million, including properties in Boston, MA, Windermere, FL, and Conyers, GA[107][108][109] Note 5: Investment Securities The company's total investment securities portfolio slightly decreased to $502.6 million as of June 30, 2025, from $533.3 million at year-end 2024, comprising RMBS, CMBS, HTM debt securities, and an equity security, with a credit loss allowance on HTM debt securities increasing to $25.5 million Investment Securities Summary (in thousands) | Security Type | Carrying Value (June 30, 2025) | Carrying Value (Dec 31, 2024) | | :--- | :--- | :--- | | RMBS, available-for-sale | $91,363 | $93,806 | | RMBS, fair value option (pre-elimination) | $413,676 | $421,122 | | CMBS, fair value option (pre-elimination) | $1,202,438 | $1,225,024 | | HTM debt securities, net | $379,787 | $406,961 | | Equity security, fair value | $4,110 | $5,146 | | Subtotal | $2,091,374 | $2,152,059 | | VIE eliminations | ($1,588,776) | ($1,618,801) | | Total investment securities | $502,598 | $533,258 | - The credit loss allowance for HTM debt securities increased from $24.5 million at year-end 2024 to $25.5 million as of June 30, 2025[132] Note 10: Secured Borrowings As of June 30, 2025, total secured borrowings increased to $16.3 billion from $14.3 billion at year-end 2024, primarily due to higher repurchase agreement balances for commercial loans, with $1.3 billion net increase in credit facility capacity and extended maturities during H1 2025 Secured Borrowings Summary (in thousands) | Facility Type | Outstanding Balance (June 30, 2025) | Outstanding Balance (Dec 31, 2024) | | :--- | :--- | :--- | | Repurchase Agreements | $10,281,675 | $8,336,385 | | Other Secured Financing | $3,344,297 | $2,899,744 | | Total Secured Financing Agreements, net | $13,540,389 | $11,151,557 | | CLOs and SASB, net | $2,782,775 | $3,196,426 | - During H1 2025, the company amended several commercial credit facilities, resulting in a net upsize of $1.3 billion and extending the weighted average maturity on amended facilities by 1.7 years[160] - In April 2025, the company refinanced a pool of infrastructure loans through a new $500.0 million CLO (Starwood 2025-SIF5), retaining $86.5 million of subordinated notes[172] Note 11: Unsecured Senior Notes The total carrying amount of unsecured senior notes increased to $3.24 billion as of June 30, 2025, from $2.99 billion at year-end 2024, driven by the issuance of $500.0 million of 6.50% Senior Notes due 2030, partially offset by the repayment of $250.0 million of 4.75% Senior Notes due 2025 Unsecured Senior Notes Outstanding (in thousands) | Note Series | Carrying Value (June 30, 2025) | Carrying Value (Dec 31, 2024) | | :--- | :--- | :--- | | 2027 Convertible Notes | $380,750 | $380,750 | | 2025 Senior Notes | — | $250,000 | | 2026 Senior Notes | $400,000 | $400,000 | | 2027 Senior Notes | $500,000 | $500,000 | | 2029 Senior Notes | $600,000 | $600,000 | | April 2030 Senior Notes | $400,000 | $400,000 | | July 2030 Senior Notes | $500,000 | $500,000 | | October 2030 Senior Notes | $500,000 | — | | Total carrying amount | $3,242,251 | $2,994,682 | - In April 2025, the company issued $500.0 million of 6.50% Senior Notes due 2030[187] - The remaining $250.0 million of the 4.75% Senior Notes due 2025 were repaid at maturity on March 15, 2025[188] Note 16: Related-Party Transactions The company incurred $46.8 million in base management fees and $10.2 million in incentive fees to its external Manager for H1 2025, while also conducting significant board-approved loan transactions with Manager affiliates, including data center and luxury condominium projects Fees Paid to Manager (in millions) | Fee Type | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Base Management Fee | $46.8 | $43.9 | | Incentive Fee | $10.2 | $22.6 | - During H1 2025, the company co-originated several large construction loans where the borrower is an affiliate of the Manager, including: - A $587.1 million data center loan in Virginia (STWD share: $287.7 million)[234] - A $638.5 million data center loan in Virginia (STWD share: $212.8 million)[235] - A $388.4 million luxury condo loan in Florida (STWD share: $190.3 million)[236] Note 17: Stockholders' Equity and Non-Controlling Interests The company declared quarterly dividends of $0.48 per share for H1 2025 and established a new $500.0 million ATM equity offering program in May 2025, issuing 1.6 million shares for $31.6 million gross proceeds during Q2 Dividends Declared in H1 2025 | Declaration Date | Record Date | Payment Date | Amount per Share | | :--- | :--- | :--- | :--- | | 6/11/25 | 6/30/25 | 7/15/25 | $0.48 | | 3/13/25 | 3/31/25 | 4/15/25 | $0.48 | - In May 2025, the company established a new ATM agreement to sell up to $500.0 million in common stock; during Q2 2025, 1,561,634 shares were issued for gross proceeds of $31.6 million[248] Note 23: Segment Data This note provides financial results for the company's four business segments, excluding securitization VIE consolidation, showing Commercial and Residential Lending as the largest net income contributor at $349.7 million for H1 2025, with the Property segment reporting a $14.4 million net loss and Corporate activities a $191.1 million loss Net Income (Loss) Attributable to STWD by Segment (in thousands) - Six Months Ended June 30, 2025 | Segment | Net Income (Loss) | | :--- | :--- | | Commercial and Residential Lending | $349,729 | | Infrastructure Lending | $38,174 | | Property Segment | ($14,428) | | Investing and Servicing Segment | $59,648 | | Corporate | ($191,054) | | Total | $242,069 | Total Assets by Segment (in thousands) - As of June 30, 2025 (pre-VIE consolidation) | Segment | Total Assets | | :--- | :--- | | Commercial and Residential Lending | $19,310,106 | | Infrastructure Lending | $3,391,821 | | Property Segment | $2,818,081 | | Investing and Servicing Segment | $1,748,364 | | Corporate | $218,571 | | Subtotal | $27,486,943 | Note 24: Subsequent Events Subsequent to quarter-end, the company acquired Fundamental Income Properties, LLC for $2.2 billion, issued 25.5 million common shares for $502.4 million, declared a Q3 2025 dividend of $0.48 per share, and amended two term loan facilities to reduce interest rate spreads - On July 23, 2025, acquired Fundamental Income Properties, LLC, a net lease real estate platform, for a total purchase price of $2.2 billion, including $1.3 billion of assumed debt[313] - In July 2025, issued 25.5 million shares of common stock in a public offering, raising $502.4 million in proceeds[314] - Declared a Q3 2025 dividend of $0.48 per share, payable on October 15, 2025[315] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, business segments, and economic outlook, detailing significant quarterly developments, analyzing segment operations, discussing non-GAAP measures like Distributable Earnings, and reviewing liquidity and capital resources amidst economic uncertainty from tariffs and interest rates impacting real estate sectors Economic Environment Management highlights increased economic uncertainty and market volatility from tariffs, potentially leading to slowdown and inflation, with elevated interest rates adversely affecting borrowers and commercial real estate values, and sector-specific challenges persisting in office, retail, and multifamily sectors impacting CECL reserves - Tariffs have increased economic uncertainty and global market volatility, raising the possibility of an economic slowdown and inflationary pressures[321] - Sector-specific headwinds continue to affect commercial real estate: the office sector is impacted by remote work, retail by e-commerce, and multifamily by sustained higher interest rates; these factors are considered in the CECL allowance[323] Developments During the Second Quarter of 2025 In Q2 2025, the Commercial and Residential Lending segment originated $1.9 billion in commercial loans and sold an equity interest for a $51.4 million gain, while Infrastructure Lending committed $698.9 million for new loans and refinanced a $500 million CLO, and Corporate issued $500 million in senior notes and 1.6 million shares for $31.6 million - Commercial and Residential Lending: Originated or acquired $1.9 billion of commercial loans, sold an equity interest for a $70.0 million gain, and redeemed $220.1 million of a CLO's third-party financing[326] - Infrastructure Lending: Committed $698.9 million for new loans and refinanced an existing loan pool via a new $500.0 million CLO (Starwood 2025-SIF5)[325][327] - Corporate: Issued $500.0 million of 6.50% Senior Notes due 2030 and issued 1.6 million shares under its ATM program for gross proceeds of $31.6 million[329] Results of Operations Net income attributable to STWD increased to $129.8 million in Q2 2025 from $112.3 million in Q1 2025, driven by Investing and Servicing segment performance, and slightly increased to $242.1 million in H1 2025 from $232.2 million in H1 2024, primarily due to a credit loss reversal and favorable derivative changes, offset by lower interest income and non-recurring gain on sale Net Income Attributable to STWD by Quarter (in thousands) | Segment | Q2 2025 | Q1 2025 | $ Change | | :--- | :--- | :--- | :--- | | Commercial and Residential Lending | $168,682 | $181,047 | ($12,365) | | Infrastructure Lending | $19,952 | $18,222 | $1,730 | | Property Segment | ($6,624) | ($7,804) | $1,180 | | Investing and Servicing Segment | $46,312 | $13,336 | $32,976 | | Corporate | ($98,508) | ($92,546) | ($5,962) | | Total | $129,814 | $112,255 | $17,559 | Net Income Attributable to STWD by H1 Period (in thousands) | Segment | H1 2025 | H1 2024 | $ Change | | :--- | :--- | :--- | :--- | | Commercial and Residential Lending | $349,729 | $325,707 | $24,022 | | Infrastructure Lending | $38,174 | $44,569 | ($6,395) | | Property Segment | ($14,428) | $81,924 | ($96,352) | | Investing and Servicing Segment | $59,648 | $15,258 | $44,390 | | Corporate | ($191,054) | ($235,236) | $44,182 | | Total | $242,069 | $232,222 | $9,847 | Non-GAAP Financial Measures The company uses Distributable Earnings, a non-GAAP measure, to evaluate performance and indicate dividend capacity by excluding non-cash items from GAAP net income; for Q2 2025, it was $151.1 million ($0.43 per share), down from Q1 2025, and for H1 2025, it was $307.4 million ($0.88 per share), down from H1 2024 - Distributable Earnings is a non-GAAP measure calculated by excluding non-cash items, unrealized gains/losses, and certain other adjustments from GAAP net income; it is used to evaluate performance and is considered a strong indicator of dividend capacity[385][388] Distributable Earnings Reconciliation Summary (in thousands) | Period | Net Income Attributable to STWD | Distributable Earnings | | :--- | :--- | :--- | | Q2 2025 | $129,814 | $151,089 | | Q1 2025 | $112,255 | $156,296 | | H1 2025 | $242,069 | $307,385 | | H1 2024 | $232,222 | $349,311 | Distributable EPS | Period | Distributable EPS | | :--- | :--- | | Q2 2025 | $0.43 | | Q1 2025 | $0.45 | | Q2 2024 | $0.48 | | Q1 2024 | $0.59 | Liquidity and Capital Resources The company's liquidity sources include cash, operating cash flows, and financing facilities, with cash and restricted cash totaling $474.9 million as of June 30, 2025; H1 2025 saw $151.5 million net cash from operations, $1.8 billion used in investing, and $1.6 billion from financing, alongside $16.4 billion in secured financings and $2.2 billion in future loan commitments Cash Flow Summary - H1 2025 (in thousands) | Cash Flow Activity | Amount | | :--- | :--- | | Net cash provided by operating activities | $151,511 | | Net cash used in investing activities | ($1,858,825) | | Net cash provided by financing activities | $1,627,352 | | Net decrease in cash | ($79,962) | Material Contractual Obligations as of June 30, 2025 (in thousands) | Obligation | Total Amount | | :--- | :--- | | Secured financings | $13,625,972 | | CLOs and SASB | $2,790,842 | | Unsecured senior notes | $3,280,750 | | Future loan commitments | $2,159,208 | Quantitative and Qualitative Disclosures about Market Risk The company manages credit, interest rate, and foreign currency risks through active asset management, hedging, and matching asset/liability characteristics, with a 1.00% decrease in index rates estimated to increase net investment income by $4.7 million annually, and foreign currency exposure substantially hedged with forward contracts - The company actively manages credit risk, interest rate risk, and foreign currency risk; strategies include matching asset and liability characteristics and using derivatives[474] Interest Rate Sensitivity Analysis (Annual Change in Net Investment Income, in thousands) | Rate Change | Estimated Impact | | :--- | :--- | | 1.00% Decrease | $4,711 | | 0.50% Decrease | ($108) | | 0.25% Increase | $625 | - Substantially all net asset exposure to GBP, EUR, AUD, CHF, and SEK has been hedged with foreign currency forward contracts as of June 30, 2025[485] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[487] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[488] Part II Other Information Legal Proceedings The company reports no material legal proceedings pending or threatened that would adversely affect its business, financial position, or results of operations - No material legal proceedings are pending or threatened against the company[491] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Form 10-K have occurred[492] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or issuer purchases of equity securities during the three months ended June 30, 2025 - There were no unregistered sales of equity securities during the second quarter of 2025[493] Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[494] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the second quarter of 2025 - No director or officer adopted or terminated a Rule 10b5-1 trading arrangement during the quarter[496] Exhibits This section lists the exhibits filed with the Form 10-Q, including the indenture for the 6.500% Senior Notes due 2030 and Sarbanes-Oxley Act certifications