2020
ANNUAL
REPORT
starwoodpropertytrust.com
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TERMINI, SANDYFORD, IRELAND
€58.7m First Mortgage
1200 K Street, Washington, DC
Porthaven Care Home, Cheshire, UK
Magna Park, Lutterworth, UK
Juhl, Las Vegas, NV
Vista Pointe, Irving, TX
The Overlook at St. Gabriel’s, Brighton, MA
California Market Center, Los Angeles, CA
200 Stovall Street, Alexandria, VA
Triton Towers, Renton, WA
Datasite, Orlando, FL
Watermarque Building, Dublin, Ireland
Omega at Bonita Bay, Bonita Springs, FL
Getaway Big Bear, Running Springs, CA
Castlehill Wood, Belfast, Ireland
Yours Truly DC, Washington, DC
Lakeshore, Irvine, CA
Turnberry Ocean Club Residences, Sunny Isles Beach, FL
Skyline Tower, Long Island City, NY
Burlingame Point, Burlingame, CA
Kings Cross, Fayetteville, NC
Parkgate, Dublin, Ireland
11 Hoyt, Brooklyn, NY
Nine Lanyon Place, Belfast, Ireland
1213 Walnut, Philadelphia, PA
Uptown 500, Wheeling, IL
88 Froelich, Woodbury, NY
Starwood Property Trust, Inc.
591 West Putnam Avenue
Greenwich, Connecticut 06830
Shareholders of Starwood Property Trust,
When we wrote to you last year, the World Health Organization had just declared the COVID-19 virus a global
pandemic. We were in the midst of historic volatility in both the equity and fixed income markets. While the ultimate
outcome of 2020 was unknown to us at the time, we reiterated that we had built Starwood Property Trust with its
diversity of business lines to outperform in all market cycles. We can now confidently say that our multi-cylinder
model, coupled with our diversified balance sheet, worked as we projected. We uniquely withstood market
dislocations, created significant excess liquidity, and while the majority of our peers were nursing their financial
wounds, we made over $3.0 billion in accretive investments across all of our business segments in 2020 since COVID
began. The total return to our shareholders in 2020, inclusive of our $1.92 dividend, was 14.5% greater than the
average of our five largest commercial real estate (CRE) mortgage REIT peers. Management is a significant
shareholder, and those of you who have invested alongside us have enjoyed a 12.6% annual return and a 295% total
return since our inception in 2009. We consider this exceptional given the main driver of our income is derived from
a loan book with an LTV ratio in the low-60% range.
Corporate Responsibility
2020 was also a watershed year in the recognition of the importance of corporate responsibility. Before discussing our
2020 performance, we would like to take a moment to mention the results of our environmental, social and governance
(ESG) initiatives, namely:
•
•
44% of our nearly 350 employees identify as female.
49% of employees identify as racially diverse.
52% of 2020 hires identify as either female or racially diverse.
•
• We are a top 10 owner of affordable housing in the United States, with over 35,000 residents in our Florida
multifamily portfolios.
•
In our non-agency residential lending (Non-QM) business, with over $5.0 billion of capital deployed since
2016, we are a leading provider of mortgages to borrowers who otherwise struggle to secure access to housing
credit.
• Starwood Infrastructure Finance, our energy infrastructure lending business, has financed over $800 million
of renewable energy assets since our purchase in 2018, generating 7,900 gigawatt hours of energy and
avoiding 7.4 million tons of CO2 emissions.
• We issued our inaugural $300 million Sustainability Bond in 2020, backed by eligible green and/or social
projects.
In addition to our accomplishments within ESG, we are proud of the transparency, a bedrock principle of our
management philosophy, we continue to demonstrate within investor reporting, which is at the core of every decision
we make. We are honored to have been recognized by the National Association of Real Estate Investment Trusts
(NAREIT) again this year as the recipient of their Gold Investor CARE Award in the Mortgage REIT category for
excellence in those areas, an award we have been the recipient of in each of the last seven years.
Overview
2020 was a difficult year, but looking back on what we accomplished, it may have been the most satisfying for our
firm. We enter 2021 with tremendous optimism about the overall health of our business, our future prospects, and
confirmed confidence in our ability to continue our robust dividend supported by continuing operations.
In March, as our stock plummeted, we “manned the walls” and had confidence in our liquidity and ability to weather
the storm. We analyzed every projected cash inflow and outflow, and we re-underwrote every asset multiple times. In
the depth of the market volatility caused by COVID-19, we never contemplated a capital raise below our estimate of
fair value of our shares, which would have destroyed shareholder value and impacted future earnings growth. We also
never contemplated a sale of our assets at a loss. We have great faith in the quality of our 60.4% loan-to-value (LTV)
large loan book and in our world class sponsors, who have supported their assets since COVID began.
While others stood back, we used the knowledge of our liquidity prospects to go on offense. We deployed over $3.0
billion of capital since COVID began, an amount that is significantly more than our five largest public commercial
mortgage REIT peers deployed in the aggregate over the same period. We did this with investments from all our
business cylinders, with term financing, and at accretive returns.
We ended 2020 with $1.98 in distributable earnings, despite the significant earnings drag of voluntarily paying down
our borrowing facilities while simultaneously holding record levels of cash to ensure we could cautiously work through
an entire credit cycle in less than 12 months.
We believe the proven consistent performance of our multi-cylinder business, our best-in-class leverage levels, the low
loan-to-value ratios of our loans, our diversified liability structure, and our embedded unrealized property asset gains
of approximately $3.00 per share position us well to continue to outperform in the years to come.
STWD Primary Investment Cylinders
Commercial Lending
In our core CRE large loan lending business, our loan book ended the year with an LTV of 60.4%, the lowest in our
history, and a loan balance of over $10 billion, a record high. We have consistently opted to utilize more expensive
non-recourse and non-credit mark financing across our business lines and have sold more first mortgage A-notes and
completed more securitizations than any of our peers in an effort to match term fund our loans. Given the uncertain
climate last year, we worked hard to reduce our future funding exposure by well over 50%, to just 7% of our assets, the
lowest of any time in the last 10 years.
Our borrowers have contributed approximately $500 million of equity to their projects since COVID began, the vast
majority of that on hotel loans. In addition, we have commitments from these sponsors for an incremental $150
million of equity contributions in our hotel portfolio alone.
Given our low loan attachment points and the financial support our sponsors continue to provide, we are confident
that our $18 billion balance sheet will significantly outperform expectations absent a divergence in the expected path
of the COVID recovery. Our interest income collections have remained strong, and although we continue to work
through a few loans where the sponsor’s underlying business plans have been disrupted by COVID, we remain
confident in the overall strength of our portfolio.
We worked hard on the right side of our balance sheet as well, selling A-notes and adding warehouse line capacity.
We continue to benefit from the LIBOR floors in our loans, and the average LIBOR floor on the 90% of our domestic
loans that have them is almost 150 basis points in the money today, allowing us to earn returns in excess of our original
underwriting.
Capital Markets
In 2020, we issued $550 million in high yield and term loan debt that we used to pay off $500 million of high yield
bonds that opened for prepayment at par during the fourth quarter, in advance of the maturity date in February 2021.
Today we have ample unencumbered assets to create more liquidity in the debt markets if we choose to do so, where
we could borrow at or below the best rates we have seen since our inception. The rebound in prices across asset classes
has created significant cushion in our financing facilities, which is another source of potential liquidity.
Property Portfolio
We had very strong performance in our property segment across our portfolio of stabilized core plus assets, where we
experienced 98% rent collections and 98% occupancy. A substantial portion of the $3.00 per share of unrealized gains
in our portfolio pertain to the assets in our owned property portfolio, particularly in our Florida multifamily assets,
which saw high occupancy and collections, as well as low turnover, throughout the pandemic.
Real Estate Investing & Servicing (REIS)
In REIS, we continued to proactively reduce our exposure to retail-exposed below investment grade CMBS. Our
CMBS portfolio is the smallest it has been since our acquisition of LNR in 2013, and 33% lower than its 2017
peak. Despite choosing to reduce our exposure to CMBS, we were able to increase our named special servicing
portfolio to over $80 billion today through purchases, partnerships and third party special servicing assignments.
Since COVID began, we took advantage of the depth and breadth of our platform to re-allocate professionals
internally to help our special servicer deal with over 1,000 bespoke special servicing requests. During this time, $5.0
billion of assets entered special servicing, which should contribute to servicing revenues in the future.
In our CMBS conduit origination business, Starwood Mortgage Capital (SMC), we had $185 million of unsecuritized
loans when COVID began. Securitizing these loans early, as many chose to do, would have crystalized significant
losses at the time. However, as investors, we were comfortable with the quality of the collateral and instead elected to
hold the loans. With the reopening of the CMBS market and spread tightening post-COVID, we securitized over
90% of those loans at or above par and expect to securitize the balance in the coming quarters. In the depths of
COVID, with many of our competitors shut down, we chose to go on offense and originate COVID appropriate
loans, realizing some of the highest profit margins in our history as bond spreads tightened in the second half of the
year. These efforts made SMC the largest non-bank originator of CMBS in the U.S. in 2020 for the first time.
Residential Lending
In Non-QM residential lending, we purchased $1.6 billion of loans in 2020 and completed four securitizations. We
added or are in the process of documenting bank lines that bring our financing capacity above $2.0 billion, which
more than fully replaces the Federal Home Loan Bank line that matured in February 2021. One of the new lines we
closed and hope to replicate is a multi-year, committed facility, which in addition to our successful securitization
program, provides the business multiple options for financing going forward, allowing us to continue to grow this low
risk, accretive business line.
Starwood Infrastructure Finance
Our energy infrastructure lending business performed well during COVID, with 100% interest collections throughout
2020. We are also happy to announce that we priced our inaugural infrastructure collateralized loan obligation (CLO)
in the first quarter of 2021, a first of its kind and the culmination of a 2+ year path we set out on after buying that
business from GE Capital. We were oversubscribed in every offered tranche, allowing us to upsize the deal from $400
million to $500 million and tighten spreads to an average coupon of LIBOR +1.81% through the BBB bonds, at an
82% advance rate. Access to the CLO markets for this business will allow us to grow our infrastructure loan book for
the first time since acquisition.
Outlook
Our ability to weather storms like COVID came from actions we took years in advance, diversifying both the asset
and liability sides of our balance sheet, and reducing exposure to credit marks and recourse. This came at a significant
cost to what would have been the best possible short term returns, but one we have always felt was worth the
investment. The work we did allowed us to take significant actions during COVID to create liquidity, execute asset
level and corporate debt financings and deploy capital at significantly higher returns than before or after the pandemic.
In short, we were able to stick to our business model of value investing without being forced to raise expensive capital
or sell assets at a loss.
We would like to again thank our Board of Directors for its leadership and all of the dedicated employees at Starwood
Property Trust and Starwood Capital Group for their hard work and expertise. Mostly, we would like to thank you,
our shareholders and partners, many of whom have been with us from the beginning, for trusting us as stewards of
your capital as we have strategically diversified our company.
In closing, we believe there is ample runway for us to continue to outperform in 2021 and beyond regardless of the
macro environment. We're proud of our past and we're really excited about our future.
Yours very truly,
Barry S. Sternlicht
Chairman and Chief Executive Officer
Jeffrey F. DiModica, CFA
President
BOARD OF DIRECTORS & EXECUTIVE TEAM
BOARD OF DIRECTORS
EXECUTIVE TEAM
Barry S. Sternlicht
Chairman & CEO
Starwood Capital Group & Starwood Property Trust
Barry S. Sternlicht
Chairman & CEO
Starwood Capital Group & Starwood Property Trust
Jeffrey F. DiModica, CFA
President & Managing Director
Starwood Property Trust
Rina Paniry
Chief Financial Officer
Starwood Property Trust
Andrew J. Sossen
Chief Operating Officer & General Counsel
Starwood Property Trust
Jeffrey G. Dishner
Senior Managing Director & Global Head of
Real Estate Acquisitions
Starwood Capital Group
Richard D. Bronson
Chairman
Camille J. Douglas
Senior Managing Director, Acquisitions &
Capital Markets
LeFrak
Solomon J. Kumin
Co-President
Leucadia Asset Management LLC
Fred Perpall
Chief Executive Officer
The Beck Group
Fred S. Ridley
Partner
Foley & Lardner LLP
Strauss Zelnick
Founding Partner
ZMC, L.P.
HEADQUARTERS OFFICE
INVESTOR RELATIONS CONTACT
Starwood Property Trust
591 West Putnam Avenue
Greenwich, CT 06830
Phone: (203) 422-7700
www. starwoodpropertytrust.com
Zachary Tanenbaum
Starwood Property Trust
Phone: (203) 422-7788
ztanenbaum@starwood.com
TRANSFER AGENT
Computershare Trust Company, N.A.
PO Box 30170
College Station, TX 77842-3170
Within USA, US territories & Canada - Phone: (877) 373 6374
Outside USA, US territories & Canada - Phone: (781) 575 3100
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(cid:1409)
(cid:1407)
For the transition period from to
Commission file number 001 - 34436
Starwood Property Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
591 West Putnam Avenue
Greenwich, Connecticut
(Address of Principal Executive Offices)
27 - 0247747
(I.R.S. Employer
Identification Number)
06830
(Zip Code)
Registrant’s telephone number, including area code (203) 422 - 7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Trading Symbol(s)
STWD
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well - known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:95) No (cid:134)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:134) No (cid:95)
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 (cid:95) No (cid:134)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such
files). Yes (cid:95) No (cid:134)
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.
Large accelerated filer (cid:95)
Non-accelerated filer (cid:134)
Accelerated filer (cid:134)
Smaller reporting company (cid:1407)
Emerging growth company (cid:1407)
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. (cid:134)
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that
prepared or issued its audit report. (cid:1409)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b - 2 of the Act). Yes (cid:1407) No (cid:95)
As of June 30, 2020, the aggregate market value of the voting stock held by non - affiliates was $4,069,113,253 based on the reported last sale
price of our common stock on June 30, 2020. Shares of our common stock held by affiliates, which includes officers and directors of the registrant, have
been excluded from this calculation. This calculation does not reflect a determination that persons are affiliates for any other purposes.
The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of February 19, 2021 was 285,450,156.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated By Reference: The information required by Part III of this Form 10 - K, to the extent not set forth herein or by
amendment, is incorporated by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A on or prior to April 30, 2021.
TABLE OF CONTENTS
Part I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . .
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16. Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Special Note Regarding Forward - Looking Statements
This Annual Report on Form 10-K (this “Form 10-K”) 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 are set forth under the caption “Risk Factors” in this report and
include, but are not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
the severity and duration of the pandemic of the novel strain of coronavirus (“COVID-19”), actions
that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact
and the adverse impacts that the COVID-19 pandemic has had, and will likely continue to have, on the
global economy, on the borrowers underlying our real estate-related assets and infrastructure loans and
tenants of our owned properties, including their ability to make payments on their loans or to pay rent,
as the case may be, and on our operations and financial performance;
defaults by borrowers in paying debt service on outstanding indebtedness;
impairment in the value of real estate property securing our loans or in which we invest;
availability of mortgage origination and acquisition opportunities acceptable to us;
potential mismatches in the timing of asset repayments and the maturity of the associated financing
agreements;
our ability to integrate our prior acquisition of the project finance origination, underwriting and capital
markets business of GE Capital Global Holdings, LLC into our business and to achieve the benefits
that we anticipate from the acquisition;
national and local economic and business conditions, including continued disruption from the
COVID-19 pandemic;
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 Form 10-K 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-
3
looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to
future results over time or otherwise.
Item 1. Business.
PART I
The following description of our business should be read in conjunction with the information included
elsewhere in this Form 10 - K for the year ended December 31, 2020. 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 due to the factors set forth in “Risk Factors” and elsewhere in this Form 10 - K. References
in this Form 10 - K to “we,” “our,” “us,” or the “Company” refer to Starwood Property Trust, Inc. and its subsidiaries.
General
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
(“IPO”). We are focused primarily on originating, acquiring, financing and managing mortgage loans and other real
estate investments in both the United States (“U.S.”) and Europe. As market conditions change over time, we may adjust
our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.
We have four reportable business segments as of December 31, 2020 and we refer to the investments within
these segments as our target assets:
• Real estate commercial and residential lending (the “Commercial and Residential Lending Segment”)—
engages primarily in originating, acquiring, financing and managing commercial first mortgages, non-
agency residential mortgages (“residential loans”), subordinated mortgages, mezzanine loans, preferred
equity, commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities
(“RMBS”) and other real estate and real estate-related debt investments in both the U.S. and Europe
(including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on
residential property and consist of non-agency residential mortgage loans that are not guaranteed by any
U.S. Government agency or federally chartered corporation.
•
Infrastructure lending (the “Infrastructure Lending Segment”)—engages primarily in originating, acquiring,
financing and managing infrastructure debt investments.
• Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity
interests in stabilized commercial real estate properties, including multifamily properties and commercial
properties subject to net leases, that are held for investment.
• Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing
business in the U.S. that manages and works out problem assets, (ii) an investment business that selectively
acquires and manages unrated, investment grade and non-investment grade rated CMBS, including
subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business
which originates conduit loans for the primary purpose of selling these loans into securitization transactions
and (iv) an investment business that selectively acquires commercial real estate assets, including properties
acquired from CMBS trusts.
Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).
We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal
corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of
our taxable income to our stockholders by prescribed dates and comply with various other requirements. We also operate
our business in a manner that will permit us to maintain our exemption from registration under the Investment Company
Act of 1940 as amended (the “Investment Company Act” or “1940 Act”).
4
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 by Mr. Sternlicht.
Our corporate headquarters office is located at 591 West Putnam Avenue, Greenwich, Connecticut 06830, and
our telephone number is (203) 422 - 7700.
Investment Strategy
We seek to attain attractive risk - adjusted returns for our investors over the long term by sourcing and managing
a diversified portfolio of target assets, financed in a manner that is designed to deliver attractive returns across a variety
of market conditions and economic cycles. Our investment strategy focuses on a few fundamental themes:
•
•
•
•
•
•
•
origination and acquisition of real estate debt assets with an implied basis sufficiently low to weather
declines in asset values;
acquisition of equity interests in commercial real estate properties that generate stable current returns,
increase the duration of our investment portfolio and provide potential for capital appreciation;
focus on real estate markets and asset classes with strong supply and demand fundamentals and/or
barriers to entry;
structuring and financing each transaction in a manner that reflects the risk of the underlying asset’s
cash flow stream and credit risk profile, and efficiently managing and maintaining the transaction’s
interest rate and currency exposures at levels consistent with management’s risk objectives;
seeking situations where our size, scale, speed and sophistication allow us to position ourselves as a
“one - stop” lending solution for real estate owner/operators;
utilizing the skills, expertise, and contacts developed by our Manager over the past 20 plus years as
one of the premier global real estate investment managers to (i) correctly anticipate trends and identify
attractive risk - adjusted investment opportunities in U.S. and European real estate markets; and
(ii) expand and diversify our presence in various asset classes, including:
•
•
origination and acquisition of residential loans, including non-agency residential loans
sometimes referred to as “non-qualified mortgages” or “non-QMs”; and
origination and acquisition of corporate and asset-backed loans;
utilizing the skills, expertise and infrastructure we acquired through our 2013 acquisition of LNR
Property LLC (“LNR”), a market leading diversified real estate investment management and loan
servicing company comprising our Investing and Servicing Segment, to expand and diversify our
presence in various segments of real estate, including:
•
•
•
•
origination of small and medium sized loan transactions ($10 million to $50 million) for both
investment and securitization/gain - on - sale;
investment in CMBS;
investment in commercial real estate;
special servicing of commercial real estate loans in commercial real estate securitization
transactions; and
5
•
utilizing the skills and expertise we acquired through our 2018 acquisition of the Infrastructure
Lending Segment from GE Capital Global Holdings, LLC (“GE Capital”) to expand our originations
and acquisitions of infrastructure debt investments.
In order to capitalize on the changing sets of investment opportunities that may be present in the various points
of an economic cycle, we may expand or refocus our investment strategy by emphasizing investments in different parts
of the capital structure and different sectors of real estate. Our investment strategy may be amended from time to time, if
recommended by our Manager and approved by our board of directors, without the approval of our stockholders. In
addition to our Manager making direct investments on our behalf, we may enter into joint venture, management or other
agreements with persons that have special expertise or sourcing capabilities.
Investment Guidelines
Our board of directors has adopted the following investment guidelines:
•
•
•
•
•
our investments will be in our target assets unless otherwise approved by our board of directors;
no investment shall be made that would cause us to fail to qualify as a REIT for federal income tax
purposes;
no investment shall be made that would cause us or any of our subsidiaries to be required to be registered
as an investment company under the 1940 Act;
not more than 25% of our equity will be invested in any individual asset without the consent of a majority
of our independent directors; and
(a) any investment that is less than $150 million will require approval of our Chief Executive Officer;
(b) any investment that is equal to or in excess of $150 million but less than $250 million will require
approval of our Manager’s investment committee; (c) any investment that is equal to or in excess of $250
million but less than $400 million will require approval of each of the investment committee of our board
of directors and our Manager’s investment committee; and (d) any investment that is equal to or in excess
of $400 million will require approval of each of our board of directors and our Manager’s investment
committee.
These investment guidelines may be changed from time to time by our board of directors without the approval
of our stockholders. In addition, both our Manager and our board of directors must approve any change in our
investment guidelines that would modify or expand the types of assets in which we invest.
Investment Process
Our investment process includes sourcing and screening of investment opportunities, assessing investment
suitability, conducting interest rate and prepayment analysis, evaluating cash flow and collateral performance, and
reviewing legal structure and servicer and originator information and investment structuring, as appropriate, to seek an
attractive return commensurate with the risk we are bearing. Upon identification of an investment opportunity, the
investment will be screened and monitored by us to determine its impact on maintaining our REIT qualification and our
exemption from registration under the 1940 Act. We will seek to make investments in sectors where we have strong core
competencies and believe market risk and expected performance can be reasonably quantified.
We evaluate each one of our investment opportunities based on its expected risk - adjusted return relative to the
returns available from other, comparable investments. In addition, we evaluate new opportunities based on their relative
expected returns compared to comparable positions held in our portfolio. The terms of any leverage available to us for
use in funding an investment purchase are also taken into consideration, as are any risks posed by illiquidity or
correlations with other securities in the portfolio. We also develop a macro outlook with respect to each target asset class
by examining factors in the broader economy such as gross domestic product, interest rates, unemployment rates and
availability of credit, among other things. We also analyze fundamental trends in the relevant target asset class sector to
adjust/maintain our outlook for that particular target asset class.
6
Financing Strategy
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption
from registering under the 1940 Act, we may finance the acquisition of our target assets, to the extent available to us,
through the following methods:
•
•
•
sources of private and government sponsored financing, including long and short - term repurchase
agreements, warehouse and bank credit facilities, and mortgage loans on equity interests in commercial real
estate properties;
loan sales, syndications and/or securitizations; and
public or private offerings of our equity and/or debt securities.
We may also utilize other sources of financing to the extent available to us.
Our Target Assets
We invest in target assets secured primarily by U.S. or European collateral. We focus primarily on originating
or opportunistically acquiring commercial mortgage whole loans, B - Notes, mezzanine loans, preferred equity and
mortgage - backed securities (“MBS”). We may invest in performing and non - performing mortgage loans and other real
estate - related loans and debt investments. We may acquire target assets through portfolio acquisitions or other types of
acquisitions. Our Manager targets desirable markets where it has expertise in the real estate collateral underlying the
assets being acquired. Our target assets include the following types of loans and other investments:
• Whole mortgage loans: loans secured by a first mortgage lien on a commercial property that provide
mortgage financing to commercial property developers or owners generally having maturity dates ranging
from three to ten years;
• B - Notes: typically a privately negotiated loan that is secured by a first mortgage on a single large
commercial property or group of related properties and subordinated to an A Note secured by the same first
mortgage on the same property or group;
• Mezzanine loans: loans made to commercial property owners that are secured by pledges of the borrower’s
ownership interests in the property and/or the property owner, subordinate to whole mortgage loans secured
by first or second mortgage liens on the property and senior to the borrower’s equity in the property;
• Construction or rehabilitation loans: mortgage loans and mezzanine loans to finance the cost of
construction or rehabilitation of a commercial property;
• CMBS: securities that are collateralized by commercial mortgage loans, including:
•
•
•
senior and subordinated investment grade CMBS,
below investment grade CMBS, and
unrated CMBS;
• Corporate bank debt: term loans and revolving credit facilities of commercial real estate operating or
finance companies, each of which are generally secured by such companies’ assets;
• Equity: equity interests in commercial real estate properties, including commercial properties purchased
from CMBS trusts;
7
• Corporate bonds: debt securities issued by commercial real estate operating or finance companies that
may or may not be secured by such companies’ assets, including:
•
•
•
investment grade corporate bonds,
below investment grade corporate bonds, and
unrated corporate bonds;
• Non - Agency RMBS: securities collateralized by residential loans that are not guaranteed by any U.S.
Government agency or federally chartered corporation;
• Residential loans: loans secured by a first mortgage lien on residential property;
•
Infrastructure loans: senior secured project finance loans and senior secured project finance investment
securities secured by power generation facilities and midstream and downstream oil and gas assets; and
• Net leases: commercial properties subject to net leases, which leases typically have longer terms than
gross leases, require tenants to pay substantially all of the operating costs associated with the properties and
often have contractually specified rent increases throughout their terms.
In addition, we may invest in the following real estate-related investments:
• Agency RMBS: RMBS for which a U.S. government agency or a federally chartered corporation
guarantees payments of principal and interest on the securities.
8
Business Segments
We currently operate our business in four reportable segments: the Commercial and Residential Lending
Segment, the Infrastructure Lending Segment, the Property Segment and the Investing and Servicing Segment. Refer to
Note 23 to the consolidated financial statements included herein (the “Consolidated Financial Statements”) for our
results of operations and financial position by business segment.
Refer to the section entitled “Risk Factors” in Part I, Item 1A of this Form 10-K for a discussion of the potential
impacts on us from the COVID-19 pandemic.
Commercial and Residential Lending Segment
The following table sets forth the amount of each category of investments we owned across various property
types within our Commercial and Residential Lending Segment as of December 31, 2020 and 2019 (dollars in
thousands):
Face
Amount
Carrying
Value
Asset Specific
Financing
Net
Investment
Unlevered
Return on
Asset
71,185
620,319
90,684
30,284
72,257
619,352
86,796
33,626
December 31, 2020
First mortgages (1) . . . . . . . . . . . . . . . . . . . . . $ 8,977,365 $ 8,930,764 $ 5,892,684 $ 3,038,080
Subordinated mortgages . . . . . . . . . . . . . . . . .
71,185
620,319
Mezzanine loans (1) . . . . . . . . . . . . . . . . . . . .
31,799
Residential loans, fair value option . . . . . . . .
30,284
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale, fair value option,
residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS, available-for-sale . . . . . . . . . . . . . . . .
RMBS, fair value option . . . . . . . . . . . . . . . . .
CMBS, fair value option . . . . . . . . . . . . . . . . .
HTM debt securities (3) . . . . . . . . . . . . . . . . .
Credit loss allowance . . . . . . . . . . . . . . . . . . .
Equity security . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . .
268,379
56,625
205,730
71,572
421,440
(72,360)
11,247
54,407
55,033
$ 11,625,873 $ 11,688,293 $ 6,824,553 $ 4,863,740
841,963
167,349
235,997 (2)
96,885 (2)
505,673
(72,360)
11,247
54,407
103,896
820,807
252,738
142,288
102,900
505,247
—
12,497
N/A
N/A
573,584
110,724
30,267
25,313
84,233
—
—
—
48,863
—
—
58,885
—
75,724
484,164
671,572
62,555
77,055
484,408
654,925
66,525
December 31, 2019
First mortgages (1) . . . . . . . . . . . . . . . . . . . . . $ 7,961,494 $ 7,926,732 $ 4,715,244 $ 3,211,488
75,724
Subordinated mortgages . . . . . . . . . . . . . . . . .
484,164
Mezzanine loans (1) . . . . . . . . . . . . . . . . . . . .
246,149
Residential loans, fair value option . . . . . . . .
62,555
Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale, fair value option,
residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss allowance, loans . . . . . . . . . . . . . .
RMBS, available-for-sale . . . . . . . . . . . . . . . .
RMBS, fair value option . . . . . . . . . . . . . . . . .
CMBS, fair value option . . . . . . . . . . . . . . . . .
HTM debt securities (3) . . . . . . . . . . . . . . . . .
Equity security . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . .
151,161
(33,415)
87,503
114,742
59,414
346,605
12,664
46,921
26,834
$ 10,855,507 $ 10,859,445 $ 5,966,936 $ 4,892,509
605,384
(33,415)
189,576
147,034 (2)
118,215 (2)
525,485
12,664
46,921
26,834
587,144
—
278,853
87,397
118,249
527,338
12,119
N/A
N/A
454,223
—
102,073
32,292
58,801
178,880
—
—
—
—
—
425,423
—
6.4 %
8.7 %
11.5 %
5.9 %
9.8 %
6.1 %
11. 0 %
6.3 %
5.6 %
6.8 %
6.4 %
9.5 %
12.2 %
5.9 %
8.9 %
5.9 %
12.3 %
10.2 %
5.5 %
7.1 %
(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
9
application of this methodology resulted in mezzanine loans with carrying values of $877.3 million and $967.0
million being classified as first mortgages as of December 31, 2020 and 2019, respectively.
Eliminated in consolidation against VIE liabilities pursuant to Accounting Standards Codification (“ASC”) 810.
CMBS held-to-maturity (“HTM”) and mandatorily redeemable preferred equity interests in commercial real
estate entities.
(2)
(3)
As of December 31, 2020 and 2019, our Commercial and Residential Lending Segment’s investment portfolio,
excluding residential loans, RMBS, properties and other investments, had the following characteristics based on carrying
values:
Collateral Property Type
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Location
U.S. Regions:
North East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid Atlantic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International:
Europe/Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bahamas/Bermuda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2020
2019
35.2 %
21.6 %
16.1 %
8.2 %
6.7 %
3.0 %
2.8 %
6.4 %
100.0 %
40.2 %
20.6 %
12.3 %
7.1 %
8.7 %
0.6 %
3.5 %
7.0 %
100.0 %
As of December 31,
2020
2019
22.7 %
19.0 %
11.1 %
9.5 %
7.3 %
4.4 %
23.3 %
2.7 %
100.0 %
27.5 %
22.2 %
10.7 %
8.3 %
7.9 %
4.1 %
16.2 %
3.1 %
100.0 %
Our primary focus has been to build a portfolio of commercial mortgage and mezzanine loans with attractive
risk - adjusted returns by focusing on the underlying real estate fundamentals and credit analysis of the borrowers. We
continually monitor borrower performance and complete a detailed, loan - by - loan formal credit review on a quarterly
basis. The results of this review are incorporated into our quarterly assessment of credit loss allowances.
As of December 31, 2020, commercial loans held - for - investment and HTM securities had a weighted - average
expected maturity of 1.5 years, inclusive of extension options that management believes are probable of exercise.
10
Infrastructure Lending Segment
The following table sets forth the amount of each category of investments we owned within our Infrastructure
Lending Segment as of December 31, 2020 and 2019 (dollars in thousands):
Face
Amount
Carrying
Value
Asset Specific
Financing
Net
Investment
Unlevered
Return on
Asset
December 31, 2020
First priority infrastructure loans and HTM
securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,488,614 $ 1,458,880 $ 1,140,608 $ 318,272
20,385
Loans held-for-sale, infrastructure . . . . . . . . . . . . .
(10,759)
Credit loss allowance . . . . . . . . . . . . . . . . . . . . . . .
25,095
Investment in unconsolidated entities . . . . . . . . . .
$ 1,609,514 $ 1,593,756 $ 1,240,763 $ 352,993
100,155
—
—
120,540
(10,759)
25,095
120,900
N/A
N/A
December 31, 2019
First priority infrastructure loans and HTM
securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,474,052 $ 1,442,601 $ 1,121,065 $ 321,536
23,723
Loans held-for-sale, infrastructure . . . . . . . . . . . . .
(196)
Credit loss allowance . . . . . . . . . . . . . . . . . . . . . . .
25,862
Investment in unconsolidated entities . . . . . . . . . .
$ 1,595,323 $ 1,587,991 $ 1,217,066 $ 370,925
119,724
(196)
25,862
121,271
N/A
N/A
96,001
—
—
5.2 %
3.5 %
6.4 %
5.1 %
As of December 31, 2020 and 2019, our Infrastructure Lending Segment’s investment portfolio had the
following characteristics based on carrying values:
Collateral Type
Natural gas power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midstream . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Renewable power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other thermal power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Location
U.S. Regions:
North East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid-Atlantic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International:
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2020
2019
65.8 %
21.9 %
9.0 %
3.3 %
100.0 %
72.6 %
12.8 %
10.6 %
4.0 %
100.0 %
As of December 31,
2020
2019
43.1 %
20.8 %
15.3 %
9.6 %
4.3 %
3.2 %
2.7 %
1.0 %
100.0 %
43.9 %
25.5 %
12.6 %
4.8 %
4.2 %
4.0 %
2.9 %
2.1 %
100.0 %
As of December 31, 2020, the Infrastructure Lending Segment’s first priority infrastructure loans and HTM
securities had a weighted - average contractual maturity of 4.6 years.
11
Property Segment
The following table sets forth the amount of each category of investments held within our Property Segment as
of December 31, 2020 and 2019 (amounts in thousands):
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,969,414
38,511
Lease intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,007,925
2020
2019
$ 2,029,024
44,986
$ 2,074,010
As of December 31,
The following table sets forth our net investment and other information regarding the Property Segment’s
properties and lease intangibles as of December 31, 2020 (dollars in thousands):
Carrying
Value
Office—Medical Office Portfolio . . . . . . . . . $ 760,192 $
Multifamily residential—Woodstar I
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily residential—Woodstar II
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail—Master Lease Portfolio . . . . . . . . . . .
Subtotal—undepreciated carrying value . .
Accumulated depreciation and amortization .
609,985
343,791
2,349,159
(341,234)
635,191
Asset
Specific
Financing
Net
Investment
592,353 $
167,839
Weighted Average
Occupancy
Rate
93.4 %
Remaining
Lease Term
5.8 years
572,493
62,698
98.5 %
0.5 years
437,042
192,721
1,794,609
—
99.1 %
100.0 %
0.5 years
21.3 years
172,943
151,070
554,550
(341,234)
213,316
Net carrying value . . . . . . . . . . . . . . . . . . . $ 2,007,925 $ 1,794,609 $
See Note 7 to the Consolidated Financial Statements for a description of the above-referenced Property
Segment Portfolios.
As of December 31, 2020 and 2019, our Property Segment’s investment portfolio had the following geographic
characteristics based on carrying values:
Geographic Location
South East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2020
2019
62.1 %
10.3 %
10.1 %
9.6 %
7.9 %
100.0 %
62.0 %
10.3 %
10.1 %
9.7 %
7.9 %
100.0 %
Refer to Schedule III included in Item 8 of this Form 10 - K for a detailed listing of the properties held by the
Company, including their respective geographic locations.
12
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 December 31, 2020 and 2019 (amounts in thousands):
Face
Amount
Carrying
Value
Asset
Specific
Financing
Net
Investment
December 31, 2020
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . $
Intangible assets - servicing rights . . . . . . . . . . . . . . .
Lease intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale, fair value option, commercial .
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,652,459 $ 1,112,145 (1) $ 360,221 (2) $
N/A
N/A
90,789
1,008
N/A
N/A
54,578 (3)
15,548
90,332
1,008
44,664 (4)
197,843
2,744,256 $ 1,516,118
—
—
53,040
—
—
192,839
$ 606,100
$
751,924
54,578
15,548
37,292
1,008
44,664
5,004
910,018
December 31, 2019
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . $ 2,897,654
N/A
Intangible assets - servicing rights . . . . . . . . . . . . . . .
N/A
Lease intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . .
160,635
Loans held-for-sale, fair value option, commercial .
1,294
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . .
N/A
Investment in unconsolidated entities . . . . . . . . . . . .
N/A
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,177,148 (1) $ 300,705
—
43,164 (3)
—
20,060
85,873
159,238
—
1,294
—
32,183 (4)
187,929
210,582
$ 574,507
3,059,583 $ 1,643,669
$
$
876,443
43,164
20,060
73,365
1,294
32,183
22,653
$ 1,069,162
(1) Includes $1.09 billion and $1.14 billion of CMBS eliminated in consolidation against VIE liabilities pursuant to
ASC 810 as of December 31, 2020 and 2019, respectively. Also includes $179.5 million and $186.6 million of non-
controlling interests in the consolidated entities which hold certain of these CMBS as of December 31, 2020 and
2019, respectively.
(2) Includes $41.3 million of non-controlling interests in the consolidated entities which hold certain debt balances as of
December 31, 2020.
(3) Includes $41.4 million and $26.2 million of servicing rights intangibles eliminated in consolidation against VIE
assets pursuant to ASC 810 as of December 31, 2020 and 2019, respectively.
(4) Includes $16.1 million and $20.6 million of investment in unconsolidated entities eliminated in consolidation
against VIE assets pursuant to ASC 810 as of December 31, 2020 and 2019, respectively
As of December 31, 2020, the Investing and Servicing Segment’s CMBS had a weighted - average expected
maturity of 7.4 years.
13
Our Investing and Servicing Segment Property Portfolio (the “REIS Equity Portfolio”), as described in Note 7
to the Consolidated Financial Statements, had the following characteristics based on carrying values of $198.2 million
and $214.9 million as of December 31, 2020 and 2019, respectively:
Property Type
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self-storage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Location
South West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid Atlantic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2020
2019
50.6 %
29.9 %
6.9 %
6.2 %
4.2 %
2.2 %
100.0 %
52.7 %
28.8 %
5.8 %
3.9 %
6.5 %
2.3 %
100.0 %
As of December 31,
2020
2019
25.1 %
24.8 %
15.4 %
14.8 %
11.5 %
8.4 %
100.0 %
22.6 %
22.0 %
22.6 %
13.5 %
8.4 %
10.9 %
100.0 %
Regulation
Our operations are subject, in certain instances, to supervision and regulation by state and federal governmental
authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements
and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates,
finance charges and other charges; (3) require disclosures to customers; (4) govern secured transactions; (5) set
collection, foreclosure, repossession and claims handling procedures and other trade practices; and (6) regulate
affordable housing rental activities. Although most states do not regulate commercial finance, certain states impose
limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require
licensing of lenders and financiers and adequate disclosure of certain contract terms. We are also required to comply
with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans and the Fair Housing
Act. We intend to conduct our business so that neither we nor any of our subsidiaries are required to register as an
investment company under the 1940 Act.
Competition
We are engaged in a competitive business. In our investment activities, we compete for opportunities with
numerous public and private investment vehicles, including financial institutions, specialty finance companies, mortgage
banks, pension funds, opportunity funds, hedge funds, insurance companies, REITs and other institutional investors, as
well as individuals. Many competitors are significantly larger than we are, have well established operating histories and
may have greater access to capital, more resources and other advantages over us. These competitors may be willing to
accept lower returns on their investments or to compromise underwriting standards and, as a result, our origination
volume and profit margins could be adversely affected.
Our Manager
We are externally managed and advised by our Manager and benefit from the personnel, relationships and
experience of our Manager’s executive team and other personnel of Starwood Capital Group. Pursuant to the terms of a
management agreement between our Manager and us, our Manager provides us with our management team and
appropriate support personnel. Pursuant to an investment advisory agreement between our Manager and Starwood
Capital Group Management, LLC, our Manager has access to the personnel and resources of Starwood Capital Group
necessary for the implementation and execution of our business strategy.
14
Our Manager is an affiliate of Starwood Capital Group, a privately - held private equity firm founded and
controlled by Mr. Sternlicht. Starwood Capital Group has invested in all major real estate asset classes, directly and
indirectly, through operating companies, portfolios of properties and single assets. Starwood Capital Group invests at
different levels of the capital structure, including equity, preferred equity, mezzanine debt and senior debt, depending on
the asset risk profile and return expectation.
Our Manager draws upon the experience and expertise of Starwood Capital Group’s team of professionals and
support personnel operating in 16 cities across seven countries. Our Manager also benefits from Starwood Capital
Group’s dedicated asset management group operating in offices located in the U.S. and abroad. We also benefit from
Starwood Capital Group’s portfolio management, finance and administration functions, which address legal, compliance,
investor relations and operational matters, asset valuation, risk management and information technologies in connection
with the performance of our Manager’s duties.
Human Capital Resources
As of December 31, 2020, the Company had 282 full - time employees, the majority of which are real estate
professionals located throughout the U.S. The Company strives to be an employer of choice, and is therefore highly
focused on creating and maintaining best in class recruitment, retention and compensation programs and a culture
designed to encourage performance, integrity and well-being. The Company believes that its competitive compensation,
outstanding benefits, training opportunities and stimulating work environment help attract and retain people with
exceptional financial and real estate skills.
Taxation of the Company
We have elected to be taxed as a REIT under the Code for federal income tax purposes. We generally must
distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any net capital gain,
in order for federal corporate income tax not to apply to our earnings that we distribute. To the extent that we satisfy this
distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate
income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the
actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under
federal tax laws. Our qualification as a REIT also depends on our ability to meet various other requirements imposed by
the Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to
owned assets and categories of income. If we qualify for taxation as a REIT, we will generally not be subject to U.S.
federal corporate income tax on our taxable income that is currently distributed to stockholders.
Even if we qualify as a REIT, we may be subject to certain federal excise taxes and state and local taxes on our
income and property. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at
regular corporate rates (including any applicable alternative minimum tax) and will not be able to qualify as a REIT for
four subsequent taxable years.
We utilize taxable REIT subsidiaries (“TRSs”) to conduct certain activities that would generate non-qualifying
income or income subject to the prohibited transaction tax if earned directly by the REIT, and to hold certain assets that
would represent non-qualifying assets if held directly by the REIT. In most cases, income associated with a TRS is
fully taxable because a TRS is classified as a regular corporation for income tax purposes.
See Item 1A—“Risk Factors—Risks Related to Our Taxation as a REIT” for additional tax status information.
Leverage Policies
Refer to Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations—
Leverage Policies.”
15
Available Information
Our website address is www.starwoodpropertytrust.com. We make available free of charge through our website
our Annual Reports on Form 10 - K, Quarterly Reports on Form 10 - Q, Current Reports on Form 8 - K, all amendments to
those reports and other filings as soon as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (the “SEC”), and also make available on our website the charters
for the Audit, Compensation and Nominating and Corporate Governance Committees of our board of directors and our
Code of Business Conduct and Ethics and Code of Ethics for Principal Executive Officer and Senior Financial Officers,
as well as our corporate governance guidelines. Copies in print of these documents are available upon request to our
Corporate Secretary at the address indicated on the cover of this report. The information on our website is not a part of,
nor is it incorporated by reference into, this Form 10 - K. Any material we file with or furnish to the SEC is also
maintained on the SEC website (http://www.sec.gov).
We intend to post on our website any amendment to, or waiver of, a provision of our Code of Business Conduct
and Ethics or Code of Ethics for Principal Executive Officer and Senior Financial Officers that applies to our Chief
Executive Officer, Chief Financial Officer or persons performing similar functions and that relates to any element of the
code of ethics definition set forth in Item 406 of Regulation S - K of the Securities Act of 1933, as amended.
To communicate with our board of directors electronically, we have established an e - mail address,
BoardofDirectors@stwdreit.com, to which stockholders may send correspondence to our board of directors or any such
individual directors or group or committee of directors.
Item 1A. Risk Factors.
Summary Risk Factors
We are subject to a number of risks that, if realized, could have a material adverse effect on our business,
financial condition, results of operations, liquidity, the market price of our common stock and our ability to make
distributions to our stockholders. Some of our more significant challenges and risks include, but are not limited to, the
following, which are described in greater detail below:
• We are dependent on Starwood Capital Group, including our Manager and their key personnel, who provide
services to us through the management agreement, and we may not find a suitable replacement for our Manager and
Starwood Capital Group if the management agreement is terminated, or for these key personnel if they leave
Starwood Capital Group or otherwise become unavailable to us.
• There are various conflicts of interest in our relationship with Starwood Capital Group, including our Manager,
which could result in decisions that are not in the best interests of our stockholders.
• The management agreement with our Manager was not negotiated on an arm’s - length basis and may not be as
favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to
terminate.
• The global COVID-19 pandemic is having, and will likely continue to have, an adverse impact on our operations
and financial performance, as well as on the operations and financial performance of many of the borrowers
underlying our real estate-related assets and tenants of our owned properties. We are unable to predict the extent to
which the pandemic and related impacts will continue to adversely impact our business, financial condition, results
of operations, liquidity, the market price of our common stock and our ability to make distributions to our
stockholders.
• Our access to sources of financing may be limited and thus our ability to maximize our returns may be adversely
affected.
• Our significant indebtedness subjects us to increased risk of loss and may reduce cash available for distributions to
our stockholders.
•
Interest rate fluctuations could significantly decrease our results of operations and cash flows and the market value
of our investments.
• Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our
16
stockholders.
• The lack of liquidity in our investments may adversely affect our business.
• Difficult conditions in the mortgage, commercial and residential real estate markets may cause us to experience
market losses related to our holdings.
• Our commercial construction or rehabilitation lending may expose us to increased lending risks.
• The commercial mortgage loans we originate or acquire and the mortgage loans underlying our CMBS investments
are subject to the ability of the commercial property owner to generate net income from operating the property, as
well as the risks of delinquency and foreclosure.
If we overestimate the yields or incorrectly price the risks of our investments, we may experience losses.
•
• The B - Notes that we acquire are subject to additional risks related to the privately negotiated structure and terms of
the transaction, which may result in losses to us. Our mezzanine loans involve greater risks of loss than senior loans
secured by similar income - producing properties.
• We may acquire and sell from time to time residential loans, including “non-QM” loans, which may subject us to
legal, regulatory and other risks, which could adversely impact our business and financial results.
• The residential loans that we may acquire, and that underlie the RMBS we acquire, are subject to risks particular to
investments secured by mortgage loans on residential property. These risks are heightened because we may
purchase non-performing loans.
• Prepayment rates may adversely affect the value of our investment portfolio.
• Some of our portfolio investments are recorded at fair value and, as a result, there is uncertainty as to the value of
these investments. We may experience a decline in the fair value of our assets.
•
Investments outside the U.S. that are denominated in foreign currencies subject us to foreign currency risks and to
the uncertainty of foreign laws and markets, which may adversely affect our distributions and our REIT status.
• We invest in equity interests in commercial real estate assets, which subjects us to the general risks of owning
commercial real estate.
• We may sponsor, or purchase the more junior securities of, CLOs and such instruments involve significant risks,
including that these securities receive distributions from the CLO only if the CLO generates enough income to first
pay all the investors holding senior tranches and all CLO expenses.
• We are subject to the risks of investing in project finance investments, many of which are outside our control, and
that may negatively impact our business and financial results.
• The investment portfolio of our Infrastructure Lending Segment is concentrated in the power industry, which
subjects the portfolio to more risks than if the investments were more diversified. The power industry is subject to
extensive regulation, which could adversely impact the business and financial performance of the projects to which
our infrastructure loans relate.
• The business activities of our Investing and Servicing Segment, particularly our special servicing business, expose
us to certain risks.
• The risks of investment in subordinated CMBS are magnified in the case of our Investing and Servicing Segment,
where the principal payments received by the CMBS trust are made in priority to the higher rated securities.
• Certain provisions of Maryland law and of our charter could inhibit changes in control.
• Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on
our operations.
•
If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular
corporation and could face a substantial tax liability, which would reduce the amount of cash available for
distribution to our stockholders.
• Complying with REIT requirements may cause us to forgo otherwise attractive opportunities or to liquidate
otherwise attractive investments.
• Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes - Oxley Act could have a material adverse effect on our business and stock price.
17
• We are highly dependent on information systems and systems failures could significantly disrupt our business,
which may, in turn, negatively affect the market price of our common stock and our ability to make distributions to
our stockholders.
The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the
information in this Form 10-K, including the risk factors set forth below in this Item 1A.
Risk Factors
Risks Related to Our Relationship with Our Manager
We are dependent on Starwood Capital Group, including our Manager and their key personnel, who provide services
to us through the management agreement, and we may not find a suitable replacement for our Manager and
Starwood Capital Group if the management agreement is terminated, or for these key personnel if they leave
Starwood Capital Group or otherwise become unavailable to us.
Our Manager has significant discretion as to the implementation of our investment and operating policies and
strategies. Accordingly, we believe that our success depends to a material extent upon the efforts, experience, diligence,
skill and network of business contacts of the officers and key personnel of our Manager. The officers and key personnel
of our Manager evaluate, negotiate, close and monitor a substantial portion of our investments; therefore, our success
depends on their continued service. The departure of any of the officers or key personnel of our Manager could have a
material adverse effect on our performance.
We offer no assurance that our Manager will remain our investment manager or that we will continue to have
access to our Manager’s officers and key personnel. The terms of our management agreement with our Manager and the
investment advisory agreement between our Manager and Starwood Capital Group Management, LLC are automatically
renewed on an annual basis; provided, however, that our Manager may terminate the management agreement annually
upon 180 days prior notice. If the management agreement and the investment advisory agreement are terminated and no
suitable replacement is found to manage us, we may not be able to continue to execute our business plan.
There are various conflicts of interest in our relationship with Starwood Capital Group, including our Manager,
which could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with Starwood Capital Group, including
our Manager. Specifically, Mr. Sternlicht, our Chairman and Chief Executive Officer, Jeffrey G. Dishner, one of our
other directors, and certain of our executive officers are executives of Starwood Capital Group.
Our Manager and executive officers may have conflicts between their duties to us and their duties to, and
interests in, Starwood Capital Group and its other investment funds. From time to time, one or more private investment
funds sponsored by Starwood Capital Group (collectively, “Starwood Private Real Estate Funds”) may be subject to
exclusivity provisions that require all or a portion of investment opportunities related to real estate to be allocated to such
Starwood Private Real Estate Funds rather than to us. Subject to the provisions of the co-investment and allocation
agreement as described in the next paragraph, there can be no assurance that future Starwood Private Real Estate Funds
would not be subject to such exclusivity requirements and, as a result, they may acquire investment opportunities that
would not be available to us. Our independent directors do not approve each co-investment made by the Starwood
Private Real Estate Funds and us unless the amount of capital we invest in the proposed co-investment otherwise
requires the review and approval of our independent directors pursuant to our investment guidelines. Pursuant to the
exclusivity provisions of the Starwood Private Real Estate Funds, our investment strategy may not include either
(i) equity interests in real estate or (ii) “near-to-medium-term loan to own” investments, in each case (of both (i) and (ii))
if such investments are expected, at the time such investment is made, to produce an internal rate of return (“IRR”)
within the target return threshold specified in the governing documents of one or more Starwood Private Real Estate
Funds. Therefore, our board of directors does not have the flexibility to expand our investment strategy to include equity
interests in real estate or “near-term loan to own” investments with such an IRR expectation.
Our Manager, Starwood Capital Group and their respective affiliates may sponsor or manage one or more
publicly traded investment vehicles, public reporting vehicles or funds that invest generally in real estate assets but not
primarily in our “target assets” (as defined in our co-investment and allocation agreement) or one or more publicly
traded investment vehicles, public reporting vehicles, or funds that do invest in some of our target assets (a “potential
competing vehicle”). Our Manager and Starwood Capital Group have also agreed in our co-investment and allocation
agreement that for so long as the management agreement is in effect and our Manager and Starwood Capital Group are
under common control, no entity controlled by Starwood Capital Group will sponsor or manage a potential competing
vehicle unless Starwood Capital Group adopts a policy that either (i) provides for the fair and equitable allocation of
18
investment opportunities in our “target assets” (as defined in our co-investment and allocation agreement) among all
such vehicles and us or (ii) provides us the right to co - invest with respect to any “target assets” (as defined in our co-
investment and allocation agreement) with such vehicles, in each case subject to the suitability of each investment
opportunity for the particular vehicle and us and each such vehicle’s and our availability of cash for investment. To the
extent that there is overlap between our investment program and that of a Starwood Private Real Estate Fund, a fair and
equitable allocation policy may involve a co-investment between us and such Starwood Private Real Estate Fund or a
chronological rotation between us and such Starwood Private Real Estate Fund. Although Starwood Capital Group has
adopted such an investment allocation policy, Starwood Capital Group has some discretion as to how investment
opportunities are allocated. As a result, we may either not be presented with the opportunity to participate in these
investments or may be limited in our ability to invest.
Our board of directors has adopted a policy with respect to any proposed investments by our directors or
officers or the officers of our Manager, which we refer to as the covered persons, in any of our target asset classes. This
policy provides that any proposed investment by a covered person for his or her own account in any of our target asset
classes will be permitted if the capital required for the investment does not exceed the personal investment limit. To the
extent that a proposed investment exceeds the personal investment limit, we expect that our board of directors will only
permit the covered person to make the investment (i) upon the approval of the disinterested directors or (ii) if the
proposed investment otherwise complies with terms of any other related party transaction policy our board of directors
has adopted. Subject to compliance with all applicable laws, these individuals may make investments for their own
account in our target assets which may present certain conflicts of interest not addressed by our current policies.
We pay our Manager substantial base management fees regardless of the performance of our portfolio. Our
Manager’s entitlement to a base management fee, which is not based upon performance metrics or goals, might reduce
its incentive to devote its time and effort to seeking investments that provide attractive risk - adjusted returns for our
portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our
common stock.
Excluding our operating subsidiaries, we do not have any employees except for Andrew Sossen, our Chief
Operating Officer, Executive Vice President, General Counsel and Chief Compliance Officer, and Rina Paniry, our
Chief Financial Officer, Treasurer and Chief Accounting Officer, whom Starwood Capital Group has seconded to us
exclusively. Mr. Sossen and Ms. Paniry are also employees of other entities affiliated with our Manager and, as a result,
are subject to potential conflicts of interest in service as our employees and as employees of such entities.
The management agreement with our Manager was not negotiated on an arm’s - length basis and may not be as
favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to
terminate.
Certain of our executive officers and two of our directors are executives of Starwood Capital Group. Our
management agreement with our Manager was negotiated between related parties and its terms, including fees payable,
may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
Termination of the management agreement with our Manager without cause is difficult and costly. Our
independent directors will review our Manager’s performance and the management fees annually and the management
agreement may be terminated annually upon the affirmative vote of at least two - thirds of our independent directors
based upon: (i) our Manager’s unsatisfactory performance that is materially detrimental to us or (ii) a determination that
the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on
unfair fees by accepting a reduction of management fees agreed to by at least two - thirds of our independent directors.
Our Manager will be provided 180 days prior notice of any such a termination. Additionally, upon such a termination,
the management agreement provides that we will pay our Manager a termination fee equal to three times the sum of the
average annual base management fee and incentive fee received by our Manager during the prior 24 - month period
before such termination, calculated as of the end of the most recently completed fiscal quarter. These provisions may
increase the cost to us of terminating the management agreement and adversely affect our ability to terminate our
Manager without cause.
Our Manager may terminate the management agreement annually upon 180 days prior notice. If the
management agreement is terminated and no suitable replacement is found to manage us, we may not be able to continue
to execute our business plan.
Pursuant to the management agreement, our Manager does not assume any responsibility other than to render
the services called for thereunder and is not responsible for any action of our board of directors in following or declining
to follow its advice or recommendations. Our Manager maintains a contractual, as opposed to a fiduciary, relationship
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with us. Under the terms of the management agreement, our Manager, its officers, members, personnel, any person
controlling or controlled by our Manager and any person providing sub - advisory services to our Manager (the
“indemnified parties”) will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s
stockholders or partners for acts or omissions performed in accordance with and pursuant to the management agreement,
except because of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties
under the management agreement. In addition, we have agreed to indemnify the indemnified parties with respect to all
expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of our Manager not
constituting bad faith, willful misconduct, gross negligence or reckless disregard of duties, performed in good faith in
accordance with and pursuant to the management agreement.
The incentive fee payable to our Manager under the management agreement is payable quarterly and is based on our
Distributable Earnings and, therefore, may cause our Manager to select investments in more risky assets to increase
its incentive compensation.
Our Manager is entitled to receive incentive compensation based upon our achievement of targeted levels of
Distributable Earnings (which is referred to as “Core Earnings” in our management agreement). In evaluating
investments and other management strategies, the opportunity to earn incentive compensation based on Distributable
Earnings may lead our Manager to place undue emphasis on the maximization of Distributable Earnings at the expense
of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with
higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our
investment portfolio.
Distributable Earnings is not a measure calculated in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) and is defined within Item 7 – Non-GAAP Financial Measures in this
Form 10-K.
Our conflicts of interest policy may not adequately address all of the conflicts of interest that may arise with respect to
our investment activities and also may limit the allocation of investments to us.
In order to avoid any actual or perceived conflicts of interest with our Manager, Starwood Capital Group, any
of their affiliates or any investment vehicle sponsored or managed by Starwood Capital Group or any of its affiliates,
which we refer to as the Starwood parties, we have adopted a conflicts of interest policy to specifically address some of
the conflicts relating to our investment opportunities. Although under this policy the approval of a majority of our
independent directors is required to approve (i) any purchase of our assets by any of the Starwood parties and (ii) any
purchase by us of any assets of any of the Starwood parties, this policy may not be adequate to address all of the
conflicts that may arise or may not address such conflicts in a manner that results in the allocation of a particular
investment opportunity to us or is otherwise favorable to us. In addition, the Starwood Private Real Estate Funds
currently, and additional competing vehicles may in the future, participate in some of our investments, possibly at a more
senior level in the capital structure of the underlying borrower and related real estate than our investment. Our interests
in such investments may also conflict with the interests of these entities in the event of a default or restructuring of the
investment. Participating investments will not be the result of arm’s length negotiations and will involve potential
conflicts between our interests and those of the other participating entities in obtaining favorable terms. Since certain of
our executives are also executives of Starwood Capital Group, the same personnel may determine the price and terms for
the investments for both us and these entities and any procedural protections, such as obtaining market prices or other
reliable indicators of fair value, may not prevent the consideration we pay for these investments from exceeding their fair
value or ensure that we receive terms for a particular investment opportunity that are as favorable as those available from
an independent third party.
Risks Related to Our Company
The global COVID-19 pandemic is having, and will likely continue to have, an adverse impact on our operations and
financial performance, as well as on the operations and financial performance of many of the borrowers underlying
our real estate-related assets and tenants of our owned properties. We are unable to predict the extent to which the
pandemic and related impacts will continue to adversely impact our business, financial condition, results of
operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders.
Our operations and financial performance have been negatively impacted by the COVID-19 pandemic that has
caused, and is expected to continue to cause, the global slowdown of economic activity and significant volatility and
disruption of financial markets. Because the severity, magnitude and duration of the COVID-19 pandemic and its
economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our business,
financial condition, results of operations, liquidity, the market price of our common stock and our ability to make
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distributions to our stockholders remains uncertain and difficult to predict. Further, the ultimate impact of the
COVID-19 pandemic on our business, financial condition, results of operations, liquidity, the market price of our
common stock and our ability to make distributions to our stockholders depends on many factors that are not within our
control, including, but not limited, to: governmental, business and individuals’ actions that have been and continue to be
taken in response to the pandemic (including the placement or re-institution of quarantine and “stay-at-home” orders or
recommendations, restrictions on travel and transport, school closures, limits on the operations of non-essential
businesses and other workforce pressures); the impact of the pandemic, and actions taken in response thereto, on global
and regional economies and economic activity, including additional surges of the pandemic or the expansion of the
economic impact thereof as a result of certain jurisdictions “re-opening” or otherwise lifting certain restrictions
prematurely; the availability of U.S. federal, state, local or non-U.S. funding programs aimed at supporting the economy
during the COVID 19-pandemic, including uncertainties regarding the potential implementation of new or extended
programs; general economic uncertainty in key global markets and financial market volatility; global economic
conditions and levels of economic growth; and the pace of recovery, including as to the availability and distribution of
treatments or vaccines.
The COVID-19 pandemic and “stay-at-home” and other measures implemented to prevent its spread and any
extended period of economic slowdown or recession could have a material adverse effect on our business, financial
condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to
our stockholders, among other matters. We expect that these adverse effects are likely to continue as long as the
outbreak persists and potentially even longer. Although it is difficult to predict the magnitude of the business and
economic implications, the COVID-19 outbreak could affect us in various ways, including, among other factors:
•
•
the decline in the value of commercial and residential real estate, which negatively impacts the value of our
investments, potentially materially.
the negative impact on the financial stability of borrowers underlying our real estate-related assets and
infrastructure loans, which is expected to increase significantly the number of borrowers who become
delinquent or default on their loans, or who seek to defer payment on, or refinance, their loans. Assets relating
to certain property types are more likely to experience particular stress as a result of the impact of COVID-19,
including in particular assets secured by hotel, multifamily and retail properties. The borrowers underlying
these assets, and the tenants at such properties, are facing operational and financial hardships resulting from the
spread of COVID-19 and related governmental measures. For example, certain of the hotel and retail properties
securing our assets were or continue to be required to temporarily close or limit their operations significantly as
a result of COVID-19 and related governmental measures, which has had a material adverse effect on the
businesses of the applicable borrowers. If the disruptions caused by the COVID-19 pandemic continue and the
restrictions put in place are not lifted, the businesses of such borrowers, and the tenants at such properties, could
continue to suffer materially or such borrowers and tenants could become insolvent.
We have been engaged in discussions with our borrowers, some of whom have indicated that, due to the impact
of the COVID-19 pandemic, they have been unable to timely execute their business plans, have had to
temporarily close their businesses or have experienced other negative business consequences and have
requested or indicated that they will be requesting interest or principal deferral or other modifications of their
loans. We therefore anticipate more frequent modifications of our loans and potentially instances of default or
foreclosure on assets underlying our loans.
To the extent that borrowers that have been negatively impacted by the COVID-19 pandemic do not timely
remit payments of principal and interest relating to their respective real estate-related assets, the value of such
assets will likely be impaired, potentially materially. Failure to receive interest when due may adversely affect
our liquidity and therefore our ability to fund our operations or address maturing liabilities on a timely basis.
• we may receive margin calls from our lenders as a result of the decline in the market value of the loans or other
assets pledged by us to our lenders under our repurchase agreements and warehouse credit facilities, and if we
fail to resolve such margin calls when due by payment of cash or delivery of additional collateral, the lenders
may exercise remedies including demanding payment by us of our aggregate outstanding financing obligations
and/or taking ownership of the loans or other assets securing the applicable obligations. We may not have the
funds available to repay such financing obligations, and we may be unable to raise the funds from alternative
sources on favorable terms or at all. Forced sales of the loans or other assets that secure our financing
obligations in order to pay outstanding financing obligations may be on terms less favorable to us than might
otherwise be available in a regularly functioning market and could result in deficiency judgments and other
claims against us.
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the adverse effect on the financial stability of the tenants in the retail and multifamily properties that we own,
which is expected to negatively impact the ability of such tenants to make their rental payments to us on a
timely basis or at all. To the extent the number of tenants who are unable to make timely rental payments to us
increases significantly, the value of these property investments will likely be impaired, potentially materially.
In addition, as a result of the foregoing, these properties may not generate sufficient funds to pay principal and
interest on the mortgage loans secured by such properties or may otherwise fail to satisfy financial covenants
applicable under the terms of such loans. In this regard, we may enter into agreements with certain of our
tenants to allow, among other items, for a deferral of some portion of the rent owed to us for an agreed-upon
period of time. Failure to receive rent when due may adversely affect our liquidity and therefore our ability to
fund our operations or address maturing liabilities on a timely basis.
if we fail to meet or satisfy any of the covenants in our repurchase agreements, warehouse credit facilities or
other financing arrangements as a result of the impact of the COVID-19 pandemic, we would be in default
under these agreements, which could result in a cross-default or cross-acceleration under other financing
arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts
may automatically become due and payable), terminate their commitments, require the posting of additional
collateral and enforce their respective interests against existing collateral.
as a result of the decline in the market value of the loans in our collateralized loan obligation (the “CLO”), we
may not meet certain interest coverage tests, overcollateralization coverage tests or other tests that could result
in a change in the priority of distributions, which could result in the reduction or elimination of distributions to
the subordinate debt and equity tranches we own until the tests have been met or certain senior classes of
securities have been paid in full. Accordingly, we may experience a reduction in our cash flow from those
interests which may adversely affect our liquidity and therefore our ability to fund our operations or address
maturing liabilities on a timely basis.
difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability
in the global financial markets or deteriorations in credit and financing conditions, which may adversely affect
our access to capital necessary to fund our operations or address maturing liabilities on a timely basis, as well as
the ability of borrowers underlying our real estate-related assets and infrastructure loans, or of tenants of the
properties we own, to meet their obligations to us.
The adverse impact of the COVID-19 pandemic could adversely affect our liquidity position and could limit
our ability to grow our business and fully execute our business strategy. We expect to preserve and build our
liquidity to best position the Company to weather near-term market uncertainty, satisfy our loan future funding
and financing obligations and to potentially make opportunistic new investments, which will cause us to take
some or all of the following actions: raise capital from offerings of securities, borrow additional capital, sell
assets, pay our management and incentive fees in shares of our common stock (as was done for the quarter
ended March 31, 2020) and/or change our dividend practice, including by reducing the amount of, or
temporarily suspending, our future dividends or paying our future dividends in kind for some period of time.
uncertainties created by the COVID-19 pandemic may make it difficult to estimate provisions for loan losses.
a general decline in business activity and demand for mortgage financing, servicing and other real estate and
real estate-related transactions, which could adversely affect our ability to source attractive investments or to
redeploy the proceeds from repayments of our existing investments.
temporary, prolonged or permanent changes involving our investment activities; to the extent we elect or are
required to limit or be more selective in making investments, we may strain our relationships or reputation with
borrowers, business partners and counterparties, breach actual or perceived obligations to them, or be subject to
litigation and claims from such borrowers, business partners and counterparties.
prolonged closures of, or other operational issues at, properties that secure our investments, or properties that
we own.
the long-term impact on the market for office properties in the event a significant number of businesses
determine to continue to utilize large-scale work-from-home policies as the COVID-19 pandemic continues and
thereafter.
government-mandated moratoriums on the construction, development or redevelopment of properties
underlying our construction or rehabilitation loans, or with respect to infrastructure projects, may prevent the
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completion, on a timely basis or at all, of such projects. The repayment of construction or rehabilitation loans
often depends on the borrower’s ability to secure permanent “take-out” financing, which requires the successful
completion of construction and stabilization of the project, or operation of the property with an income stream
sufficient to meet operating expenses. Similarly, because the loan structure for project finance relies primarily
on the underlying project’s cash flows for repayment, the ability of the project company to repay a project
finance loan is dependent upon the successful development, construction and/or operation of such project rather
than upon the existence of independent income or assets of the project company. Accordingly, if a project
cannot be completed on a timely basis or at all as a result of the COVID-19 pandemic and related governmental
measures, the ability to repay the applicable loan will likely be impaired. In addition, certain of such projects
may rely on tax credits which may be available only if construction is completed by certain deadlines, which
may not be met because of such moratoriums.
To the extent the COVID-19 pandemic adversely affects our business, financial condition, results of operations,
liquidity, the market price of our common stock and our ability to make distributions to our stockholders, it may also
have the effect of heightening many of the other risks described in this Item 1A.
Provisions for credit losses are difficult to estimate.
Our credit loss provision is evaluated on a quarterly basis. The determination of such provision requires us to
make certain estimates and judgments, which may be difficult to determine. Our estimates and judgments are based on a
number of factors, including projected cash flow from the collateral securing our loans, debt structure, including the
availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, potential for
refinancing and expected market discount rates for varying property types, all of which remain uncertain and are
subjective. Our estimates and judgments may not be correct and, therefore, our results of operations and financial
condition could be severely impacted.
Accounting Standards Update 2016-13, “Financial Instruments—Credit Losses, Measurement of Credit Losses
on Financial Instruments (Topic 326),” which replaces the “incurred loss” model for recognizing credit losses with an
“expected loss” model referred to as the Current Expected Credit Loss model (“CECL”) became effective for us on
January 1, 2020. Under the CECL model, we are required to provide allowances for credit losses on certain financial
assets carried at amortized cost, such as loans held-for-investment and held-to-maturity debt securities, including related
future funding commitments and accrued interest receivable. The measurement of expected credit losses is to be based
on information about past events, including historical experience, current conditions, and reasonable and supportable
forecasts that affect the collectability of the reported amount. This measurement takes place at the time the financial
asset is first added to the balance sheet and updated quarterly thereafter. This differs significantly from the “incurred
loss” model previously required under GAAP, which delayed recognition until it was probable a loss had been incurred.
Accordingly, the adoption of the CECL model has materially affected how we determine our credit loss provision and
required us to significantly increase our allowance and recognize provisions for credit losses earlier in the lending cycle.
Moreover, the CECL model creates more volatility in the level of our credit loss provisions. If we are required to
materially increase our future level of credit loss allowances for any reason, such increase could adversely affect our
business, results of operations, liquidity and financial condition.
We have not established a minimum distribution payment level and we may not be able to make distributions to our
stockholders in the future at current levels or at all.
We are generally required to distribute to our stockholders at least 90% of our taxable income each year for us
to qualify as a REIT under the Code, which requirement we currently intend to satisfy through quarterly distributions of
all or substantially all of our REIT taxable income in such year, subject to certain adjustments. We have not established a
minimum distribution payment level, and our ability to pay distributions may be adversely affected by a number of
factors, including the risk factors contained in this Form 10-K. Although we have made, and anticipate continuing to
make, quarterly distributions to our stockholders, our board of directors has the sole discretion to determine the timing,
form and amount of any future distributions to our stockholders, and such determination will depend on our earnings,
our financial condition, debt covenants, maintenance of our REIT qualification and other factors as our board of
directors may deem relevant from time to time. We believe that a change in any one of the following factors could
adversely affect our results of operations and impair our ability to continue to pay distributions to our stockholders:
•
•
the profitability of the investment of the net proceeds from our equity offerings;
our ability to make profitable investments;
• margin calls or other expenses that reduce our cash flow;
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•
•
defaults in our asset portfolio or decreases in the value of our portfolio; and
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from
estimates.
As a result, distributions to our stockholders in the future may not continue or the level of any future
distributions we do make to our stockholders may not achieve a market yield or increase or even be maintained over
time, any of which could materially and adversely affect our stockholders’ return on investment.
In addition, distributions that we make to our stockholders are generally taxable to our stockholders as ordinary
income. However, a portion of our distributions may be designated by us as long - term capital gains to the extent that
they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they
exceed our earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of
reducing the basis of a stockholder’s investment in our common stock.
Risks Related to Sources of Financing
Our access to sources of financing may be limited and thus our ability to maximize our returns may be adversely
affected.
Our financing sources currently include our credit agreements, our master repurchase agreements, our
collateralized loan obligation (“CLO”), our convertible senior notes, our senior notes, our mortgage debt on certain
investment properties and common stock and debt offerings. Subject to market conditions and availability, we may seek
additional sources of financing in the form of bank credit facilities (including term loans and revolving facilities),
repurchase agreements, warehouse facilities, structured financing arrangements, public and private equity and debt
issuances and derivative instruments, in addition to transaction or asset-specific funding arrangements.
Our access to additional sources of financing will depend upon a number of factors, over which we have little
or no control, including:
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•
•
general market conditions, including as a result of the COVID-19 pandemic;
the market’s view of the quality of our assets;
the market’s perception of our growth potential;
our current and potential future earnings and cash distributions; and
the market price of the shares of our common stock.
A dislocation and/or weakness in the capital and credit markets, including as a result of the COVID-19
pandemic, could adversely affect one or more private lenders and could cause one or more of our private lenders to be
unwilling or unable to provide us with financing or to increase the costs of that financing. In addition, if regulatory
capital requirements imposed on our private lenders change, they may be required to limit, or increase the cost of,
financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or
require us to sell assets at an inopportune time or price.
To the extent structured financing arrangements are unavailable, we may have to rely more heavily on
additional equity issuances, which may be dilutive to our stockholders, or on less efficient forms of debt financing that
require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future
business opportunities, cash distributions to our stockholders and other purposes. We cannot assure you that we will
have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired
times, or at all, which may cause us to curtail our asset acquisition activities and/or dispose of assets, which could
negatively affect our results of operations.
Our significant indebtedness subjects us to increased risk of loss and may reduce cash available for distributions to
our stockholders.
We currently have a significant amount of indebtedness outstanding. As of December 31, 2020, our total
consolidated indebtedness was approximately $12.8 billion (excluding accounts payable, accrued expenses, other
liabilities, VIE liabilities and unfunded commitments). Our outstanding indebtedness currently includes our credit
agreements, our repurchase agreements, our CLO, our convertible senior notes, our senior notes and mortgage debt on
certain investment properties. Subject to market conditions and availability, we may incur additional debt through bank
credit facilities (including term loans and revolving facilities), repurchase agreements, warehouse facilities, structured
financing arrangements, public and private debt issuances and derivative instruments, in addition to transaction or asset-
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specific funding arrangements. The percentage of leverage we employ varies depending on our available capital, our
ability to obtain and access financing arrangements with lenders and the lenders’ and rating agencies’ estimate of the
stability of our investment portfolio’s cash flow. Our governing documents contain no limitation on the amount of debt
we may incur. We may significantly increase the amount of leverage we utilize at any time without approval of our
board of directors. However, our secured debt agreements contain customary affirmative and negative covenants,
including financial covenants, that in some cases restrict our total leverage (as defined therein). Moreover, the respective
indentures governing our senior notes contain covenants that, subject to a number of exceptions and adjustments, among
other things, limit our ability to incur additional indebtedness and require that we maintain total unencumbered assets (as
defined therein) of not less than 120% of the aggregate principal amount of our outstanding unsecured indebtedness (as
defined therein). In addition, we may leverage individual assets at substantially higher levels. Incurring substantial debt
subjects us to many risks that, if realized, would materially and adversely affect us, including the risk that:
•
our cash flow from operations may be insufficient to make required payments of principal of and interest on the
debt or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in
(i) acceleration of such debt (and any other debt containing a cross - default or cross - acceleration provision) that
we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to
borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings
under those arrangements and/or (iii) the loss of some or all of our assets to foreclosure or sale;
•
our debt may increase our vulnerability to adverse economic and industry conditions, and investment yields
may not increase with higher financing costs;
• we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt,
thereby reducing funds available for operations, future business opportunities, stockholder distributions or other
purposes; and
• we may not be able to refinance debt that matures prior to the investment it was used to finance on favorable
terms, or at all.
In addition, subject to certain conditions, the lenders under our credit facilities retain the sole discretion over the
market value of loans and/or securities that serve as collateral for the borrowings under our credit facilities for purposes
of determining whether we are required to pay margin to such lenders.
Interest rate fluctuations could significantly decrease our results of operations and cash flows and the market value
of our investments.
Our primary interest rate exposures relate to the following:
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changes in interest rates may affect the yield on our investments and the financing cost of our debt, as well as
the performance of our interest rate swaps that we utilize for hedging purposes, which could result in operating
losses for us should interest expense exceed interest income;
declines in interest rates may reduce the yield on existing floating rate assets and/or the yield on prospective
investments;
changes in the level of interest rates may affect our ability to source investments;
increases in the level of interest rates may negatively impact the value of our investments and our ability to
realize gains from the disposition of assets;
increases in the level of interest rates may (x) increase the credit risk of our assets by negatively impacting the
ability of our borrowers to pay debt service or our ability to refinance our assets upon maturity and
(y) negatively impact the value of the real estate supporting our investments (or that we own directly) through
the impact such increases can have on property valuation capitalization rates; and
changes in interest rates and/or the differential between U.S. dollar interest rates and those of non - dollar
currencies in which we invest can adversely affect the value of our non - dollar assets and/or associated currency
hedging transactions.
Our operating results depend in large part on differences between the income from our assets, net of credit
losses, and our financing costs. We anticipate that for any period during which our assets are not match - funded, the
income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings.
Consequently, changes in interest rates may significantly influence our net income. Interest rate fluctuations resulting in
our interest expense exceeding interest income would result in operating losses for us.
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In addition, our variable rate indebtedness may use LIBOR as a benchmark for establishing the rate. As was
announced in July 2017, LIBOR is anticipated to be phased out by the end of 2021. However, for U.S. dollar LIBOR, it
now appears that the relevant date may be deferred to June 30, 2023 for the most common tenors (overnight and one,
three, six and 12 months). An extension to 2023 would mean that many legacy U.S. dollar LIBOR contracts would
terminate before related LIBOR rates cease to be published. However, regulators emphasized that, despite any continued
publication of U.S. dollar LIBOR through June 30, 2023, no new contracts using U.S. dollar LIBOR should be entered
into after December 31, 2021. Moreover, the LIBOR administrator has indicated its intention to cease publication of
non-U.S. dollar LIBOR after December 31, 2021. Although the foregoing may provide some sense of timing, there is no
assurance that LIBOR, of any particular currency and tenor, will continue to be published until any particular date.
Uncertainty as to the foregoing, the nature of alternative reference rates and as to potential changes or other reforms to
LIBOR may adversely impact the availability and cost of borrowings.
Our warehouse facilities may limit our ability to acquire assets, and we may incur losses if the collateral is liquidated.
We utilize warehouse facilities pursuant to which we accumulate mortgage loans in anticipation of a
securitization financing, which assets are pledged as collateral for such facilities until the securitization transaction is
consummated. In order to borrow funds to acquire assets under any additional warehouse facilities, we expect that our
lenders thereunder would have the right to review the potential assets for which we are seeking financing. We may be
unable to obtain the consent of a lender to acquire assets that we believe would be beneficial to us and we may be unable
to obtain alternate financing for such assets. In addition, a securitization transaction may not be consummated with
respect to the assets being warehoused. If the securitization is not consummated, the lender could liquidate the
warehoused collateral and we would then have to pay any amount by which the original purchase price of the collateral
assets exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the
securitization is consummated, if any of the warehoused collateral is sold before the consummation, we would have to
bear any resulting loss on the sale. We may not be able to obtain additional warehouse facilities on favorable terms, or at
all.
The utilization of our repurchase agreements is subject to the pre - approval of the lender.
We utilize repurchase agreements to finance the purchase of certain investments. In order for us to borrow
funds under a repurchase agreement, our lender must have the right to review the potential assets for which we are
seeking financing and approve such assets in its sole discretion. Accordingly, we may be unable to obtain the consent of
a lender to finance an investment and alternate sources of financing for such asset may not exist.
A failure to comply with restrictive covenants in our financing arrangements would have a material adverse effect on
us, and any future financings may require us to provide additional collateral or pay down debt.
We are subject to various restrictive covenants contained in our existing financing arrangements and may
become subject to additional covenants in connection with future financings. Our credit agreements contain covenants
that restrict our ability to incur additional debt or liens, make certain investments or acquisitions, merge, consolidate or
transfer or dispose of substantially all of our assets or otherwise dispose of property and assets, pay dividends and make
certain other restricted payments, change the nature of our business or enter into transactions with affiliates. Our credit
agreements, as well as our master repurchase agreements, each requires us to maintain compliance with various financial
covenants, including, as applicable, a minimum tangible net worth and cash liquidity, and specified financial ratios, such
as total debt to total assets and EBITDA to fixed charges or loan-to-value ratios. In addition, the respective indentures
governing our respective senior notes contain covenants that, subject to a number of exceptions, adjustments and, in
certain circumstances, termination provisions, among other things: limit our ability to incur additional indebtedness;
require that we maintain total unencumbered assets (as defined therein) of not less than 120% of the aggregate principal
amount of our outstanding unsecured indebtedness (as defined therein); and impose certain requirements in order for us
to merge or consolidate with another person.
These covenants may limit our flexibility to pursue certain investments or incur additional debt. If we fail to
meet or satisfy any of these covenants, we would be in default under these agreements and our indebtedness could be
declared due and payable. In addition, our lenders could terminate their commitments, require the posting of additional
collateral and enforce their interests against existing collateral. We may also be subject to cross - default and acceleration
rights and, with respect to collateralized debt, the posting of additional collateral and foreclosure rights upon default.
Further, such limitations on our liquidity could also make it difficult for us to satisfy the distribution requirements
necessary to maintain our status as a REIT for U.S. federal income tax purposes.
Our credit agreements and master repurchase agreements also involve the risk that the market value of the loans
pledged or sold by us to the repurchase agreement counterparty or provider of the bank credit facility may decline in
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value, in which case the lender may require us to provide additional collateral or to repay all or a portion of the funds
advanced. We may not have the funds available to repay our debt at that time, which would likely result in defaults
unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or
at all. Posting additional collateral would reduce our liquidity and limit our ability to leverage our assets. If we cannot
meet these requirements, the lender could accelerate our indebtedness, increase the interest rate on advanced funds and
terminate our ability to borrow funds from them, which could materially and adversely affect our financial condition and
ability to continue to implement our business plan. In addition, in the event that the lender files for bankruptcy or
becomes insolvent, our loans may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least
temporarily, of the benefit of these assets. Such an event could restrict our access to bank credit facilities and increase
our cost of capital.
If one or more of our Manager’s executive officers are no longer employed by our Manager, the financial institutions
providing us financing may not provide future financing to us, which could materially and adversely affect us.
If financial institutions with whom we seek to finance our investments require that one or more of our
Manager’s executives continue to serve in such capacity and if one or more of our Manager’s executives are no longer
employed by our Manager, it may constitute an event of default and the financial institution providing the arrangement
may have acceleration rights with respect to outstanding borrowings and termination rights with respect to our ability to
finance our future investments with that institution. If we are unable to obtain financing for our accelerated borrowings
and for our future investments under such circumstances, we could be materially and adversely affected.
We directly or indirectly utilize non - recourse securitizations, and such structures expose us to risks that could result
in losses to us.
We utilize non - recourse securitizations of our investments in mortgage loans to the extent consistent with the
maintenance of our REIT qualification and exemption from the Investment Company Act in order to generate cash for
funding new investments and/or to leverage existing assets. In most instances, this involves us transferring our loans to a
special purpose securitization entity in exchange for cash. In some sale transactions, we also retain a subordinated
interest in the loans sold. The securitization of our portfolio investments might magnify our exposure to losses on those
portfolio investments because the subordinated interest we retain in the loans sold would be subordinate to the senior
interest in the loans sold, and we would, therefore, absorb all of the losses sustained with respect to a loan sold before the
owners of the senior interest experience any losses. Moreover, we cannot be assured that we will be able to access the
securitization market in the future or be able to do so at favorable rates. The inability to consummate securitizations of
our portfolio investments to finance our investments on a long - term basis could require us to seek other forms of
potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect
our performance and our ability to continue to grow our business.
We may not have the ability to raise funds on acceptable terms necessary to settle conversions of our outstanding
convertible senior notes or to purchase our outstanding convertible senior notes upon a fundamental change.
As of December 31, 2020, we had $250.0 million in principal amount of convertible senior notes outstanding. If
a fundamental change within the meaning of our outstanding convertible senior notes occurs, holders of those notes will
have the right to require us to purchase for cash any or all of their notes. The fundamental change purchase price will
equal 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest thereon. In addition,
upon conversion of the convertible senior notes, we will be required to make cash payments in respect of the notes being
converted, unless we elect to settle the conversion entirely in shares of our common stock. However, we may not have
sufficient funds at the time we are required to purchase the notes surrendered therefor or to make cash payments on the
notes being converted, and we may not be able to arrange necessary financing on acceptable terms. If we were unable to
raise necessary funding on acceptable terms, our operating results and financial position could be negatively impacted if
we were required to repurchase the notes or to pay cash upon conversion.
Risks Related to Hedging
We enter into hedging transactions that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into
hedging transactions that require us to fund cash payments in certain circumstances (such as the early termination of the
hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to
request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be
equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees
and charges. These economic losses will be reflected in our results of operations, and our ability to fund these
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obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these
obligations could adversely impact our financial condition.
Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our
stockholders.
Subject to maintaining our qualification as a REIT, we pursue various hedging strategies to seek to reduce our
exposure to adverse changes in interest and foreign currency rates. Our hedging activity varies in scope based on the
level and volatility of interest rates, exchange rates, the types of assets held and other changing market conditions.
Hedging may fail to protect or could adversely affect us because, among other things:
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interest rate, currency and/or credit hedging can be expensive and may result in us receiving less interest
income;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is
sought;
due to a credit loss, prepayment or asset sale, the duration of the hedge may not match the duration of the
related asset or liability;
the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that
satisfy certain requirements of the Code or that are done through a TRS) to offset losses is limited by U.S.
federal tax provisions governing REITs;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent
that it impairs our ability to sell or assign our side of the hedging transaction; and
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
In addition, we may fail to recalculate, readjust or execute hedges in an efficient manner.
Any hedging activity in which we engage may materially and adversely affect our results of operations and cash
flows. Therefore, while we may enter into such transactions seeking to reduce risks, unanticipated changes in interest
rates, credit spreads or currencies may result in poorer overall investment performance than if we had not engaged in any
such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a
hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially.
Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments
and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the
intended hedge and expose us to risk of loss.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house,
or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could result in material
losses.
The cost of using hedging instruments increases as the period covered by the instrument increases and during
periods of rising and volatile interest rates. In addition, some hedging instruments involve risk because they often are not
traded on regulated exchanges, guaranteed by an exchange or its clearing house or regulated by any U.S. or foreign
governmental authorities. Consequently, in many cases, there are no requirements with respect to record keeping,
financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements
underlying hedging transactions may depend on compliance with applicable securities, commodity and other regulatory
requirements and, depending on the identity of the counterparty, applicable international requirements. The business
failure of a hedging counterparty with whom we enter into a hedging transaction that is not cleared on a regulated
centralized clearing house will most likely result in its default. Default by a party with whom we enter into a hedging
transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current
market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always
be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not
be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary
market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise
or expiration, which could result in significant losses.
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We may fail to qualify for, or choose not to elect, hedge accounting treatment.
We record derivative and hedging transactions in accordance with GAAP. Under these standards, we may fail
to qualify for, or choose not to elect, hedge accounting treatment for a number of reasons, including if we use
instruments that do not meet the definition of a derivative (such as short sales), we fail to satisfy hedge documentation
and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for, or
choose not to elect, hedge accounting treatment, our operating results may be volatile because changes in the fair value
of the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or
item.
We enter into derivative contracts that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, we enter into derivative contracts that could require us to
fund cash payments in the future under certain circumstances (e.g., the early termination of the derivative agreement
caused by an event of default or other early termination event, or the decision by a counterparty to request margin
securities it is contractually owed under the terms of the derivative contract). The amount due would be equal to the
unrealized loss of the open swap positions with the respective counterparty and could also include other fees and
charges. These economic losses may materially and adversely affect our results of operations and cash flows.
Risks Related to Our Real Estate-Related Investments
The lack of liquidity in our investments may adversely affect our business.
The lack of liquidity of our investments in real estate loans and investments, other than certain of our
investments in MBS, may make it difficult for us to sell such investments if the need or desire arises. Many of the
securities we purchase are not registered under the relevant securities laws, resulting in a prohibition against their
transfer, sale, pledge or their disposition, except in a transaction that is exempt from the registration requirements of, or
otherwise in accordance with, those laws. In addition, certain investments such as B - Notes, mezzanine loans and bridge
and other loans are also particularly illiquid investments due to their short life, their potential unsuitability for
securitization and/or the greater difficulty of recovery in the event of a borrower default. As a result, many of our current
investments are, and our future investments will be, illiquid and if we are required to liquidate all or a portion of our
portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments.
Further, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we
or our Manager has or could be attributed with material non - public information regarding such business entity. As a
result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively
limited, which could adversely affect our results of operations and financial condition.
In connection with certain contributions of properties to our subsidiary, SPT Dolphin Intermediate LLC (“SPT
Dolphin”), we have entered into a tax protection agreement with the contributors of such properties, pursuant to which
SPT Dolphin is generally restricted from transferring the applicable properties during a specified period unless such
contributors are indemnified against the tax liability on their shares of any gain recognized in such transfers (as well as
any such tax liability arising due to SPT Dolphin not maintaining a specified level of nonrecourse debt on those
properties during the specified period). This tax protection agreement, and any additional tax protection agreements that
a subsidiary of ours may enter into in the future, will limit our flexibility to sell or otherwise dispose of, or to reduce the
amount of indebtedness encumbering, the relevant properties even if it would otherwise be economically advantageous
to us to do so.
Our investments may be concentrated and are subject to risk of default.
While we seek to diversify our portfolio of investments, we are not required to observe specific diversification
criteria, except as may be set forth in the investment guidelines adopted by our board of directors. Therefore, our
investments in our target assets may at times be concentrated in certain property types that are subject to higher risk of
foreclosure or secured by properties concentrated in a limited number of geographic locations. To the extent that our
portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or type of asset
may result in defaults on a number of our investments within a short time period, which may reduce our net income and
the value of our common stock and accordingly reduce our ability to make distributions to our stockholders.
Difficult conditions in the mortgage, commercial and residential real estate markets may cause us to experience
market losses related to our holdings.
Our results of operations are materially affected by conditions in the real estate markets, the financial markets
and the economy generally. Concerns about the real estate market, as well as the COVID-19 pandemic, inflation, energy
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costs, geopolitical issues and the availability and cost of credit, have contributed to increased volatility and diminished
expectations for the economy and markets going forward. The residential mortgage market has been affected by changes
in the lending landscape, and there is no assurance that these conditions have stabilized or that they will not worsen. The
disruption in the residential mortgage market has an impact on new demand for homes, which weigh on future home
price performance. There is a strong inverse correlation between home price growth rates and mortgage loan
delinquencies. Deterioration in the real estate market may cause us to experience losses related to our assets and to sell
assets at a loss. Declines in the market values of our investments may adversely affect our results of operations and
credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.
Our preferred equity investments involve a greater risk of loss than conventional debt financing.
We make preferred equity investments. These investments involve a higher degree of risk than conventional
debt financing due to a variety of factors, including their non - collateralized nature and subordinated ranking to other
loans and liabilities of the entity in which such preferred equity is held. Accordingly, if the issuer defaults on our
investment, we would only be able to proceed against such entity in accordance with the terms of the preferred security
and not against any property owned by such entity. Furthermore, in the event of bankruptcy or foreclosure, we would
only be able to recoup our investment after all lenders to, and other creditors of, such entity are paid in full. As a result,
we may lose all or a significant part of our investment, which could result in significant losses.
Our commercial construction or rehabilitation lending may expose us to increased lending risks.
Construction or rehabilitation loans generally expose a lender to greater risk of non - payment and loss than
permanent commercial mortgage loans because repayment of the loans often depends on the borrower’s ability to secure
permanent “take - out” financing, which requires the successful completion of construction, renovation, refurbishment or
expansion and stabilization of the project, or operation of the property with an income stream sufficient to meet
operating expenses, including debt service on such replacement financing. For construction or rehabilitation loans,
increased risks include the accuracy of the estimate of the property’s value at completion of construction, renovation,
refurbishment or expansion and the estimated cost of construction, renovation, refurbishment or expansion—all of which
may be affected by unanticipated delays and cost over - runs. Such loans typically involve an expectation that the
borrower’s sponsors will contribute sufficient equity funds in order to keep the loan “in balance,” and the sponsors’
failure or inability to meet this obligation could result in delays in construction, renovation, refurbishment or expansion
or an inability to complete such work. Commercial construction or rehabilitation loans also expose the lender to
additional risks of contractor non - performance or borrower disputes with contractors resulting in mechanic’s or
materialmen’s liens on the property and possible further delay. In addition, since such loans generally entail greater risk
than mortgage loans on income producing property, we may need to increase our allowance for loan losses in the future
to account for the likely increase in probable incurred credit losses associated with such loans. Further, as the lender
under a construction or rehabilitation loan, we may be obligated to fund all or a significant portion of the loan at one or
more future dates. We may not have the funds available at such future date(s) to meet our funding obligations under the
loan. In that event, we would likely be in breach of the loan unless we are able to raise the funds from alternative
sources, which we may not be able to achieve on favorable terms or at all. In addition, many of our construction or
rehabilitation loans have multiple lenders and if another lender fails to fund, we could be faced with the choice of either
funding for that defaulting lender or suffering a delay or protracted interruption in the progress of construction,
renovation, refurbishment or expansion.
The commercial mortgage loans we originate or acquire and the mortgage loans underlying our CMBS investments
are subject to the ability of the commercial property owner to generate net income from operating the property, as
well as the risks of delinquency and foreclosure.
Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of
delinquency and foreclosure, and risks of loss may be greater than similar risks associated with loans made on the
security of single - family residential property. The ability of a borrower to repay a loan secured by an income - producing
property typically is dependent primarily upon the successful operation of such property rather than upon the existence
of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s
ability to repay the loan may be impaired. Net operating income of an income - producing property can be adversely
affected by, among other things,
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tenant mix;
success of tenant businesses;
property management decisions;
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property location, condition and design;
competition from comparable types of properties;
changes in laws that increase operating expenses or limit rents that may be charged;
changes in national, regional or local economic conditions and/or specific industry segments, including the
credit and securitization markets;
declines in regional or local real estate values;
declines in regional or local rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating expenses;
costs of remediation and liabilities associated with environmental conditions;
the potential for uninsured or underinsured property losses;
changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental
legislation and the related costs of compliance; and
acts of God, terrorist attacks, pandemics, such as COVID-19, natural disasters, social unrest and civil
disturbances.
In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to
the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage
loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for
distribution to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such
borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of
bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the
avoidance powers of the bankruptcy trustee or debtor - in - possession to the extent the lien is unenforceable under state
law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative
effect on our anticipated return on the foreclosed mortgage loan.
Our investments in CMBS are generally subject to losses.
Our investments in CMBS are subject to losses. In general, losses on a mortgaged property securing a mortgage
loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or
letter of credit, if any, then by the holder of a mezzanine loan or B - Note, if any, then by the “first loss” subordinated
security holder (generally, the “B - Piece” buyer) and then by the holder of a higher - rated security. In the event of default
and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B - Notes, and any classes of
securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we
purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values
subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the
related CMBS, there would be an increased risk of loss. The prices of lower credit quality securities are generally less
sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns
or individual issuer developments.
Dislocations, illiquidity and volatility in the market for commercial real estate as well as the broader financial
markets could adversely affect the performance and value of commercial mortgage loans, the demand for CMBS and
the value of CMBS investments.
Any significant dislocations, illiquidity or volatility in the real estate and securitization markets, including the
market for CMBS, as well as global financial markets and the economy generally, could adversely affect our business
and financial results. We cannot assure you that dislocations in the commercial mortgage loan market will not occur in
the future.
Challenging economic conditions affect the financial strength of many commercial, multifamily and other
tenants and result in increased rent delinquencies and decreased occupancy. Economic challenges may lead to decreased
occupancy, decreased rents or other declines in income from, or the value of, commercial, multifamily and manufactured
housing community real estate.
Declining commercial real estate values, coupled with tighter underwriting standards for commercial real estate
loans, may prevent commercial borrowers from refinancing their mortgages, which results in increased delinquencies
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and defaults on commercial, multifamily and other mortgage loans. Declines in commercial real estate values also result
in reduced borrower equity, further hindering borrowers’ ability to refinance in an environment of increasingly
restrictive lending standards and giving them less incentive to cure delinquencies and avoid foreclosure. The lack of
refinancing opportunities has impacted and could impact in the future, in particular, mortgage loans that do not fully
amortize and on which there is a substantial balloon payment due at maturity, because borrowers generally expect to
refinance these types of loans on or prior to their maturity date. Finally, declining commercial real estate values and the
associated increases in loan - to - value ratios would result in lower recoveries on foreclosure and an increase in losses
above those that would have been realized had commercial property values remained the same or increased. Continuing
defaults, delinquencies and losses would further decrease property values, thereby resulting in additional defaults by
commercial mortgage borrowers, further credit constraints and further declines in property values.
For a discussion of the risk factors affecting us relating to the COVID-19 pandemic, see “The global
COVID-19 pandemic is having, and will likely continue to have, an adverse impact on our operations and financial
performance, as well as on the operations and financial performance of many of the borrowers underlying our real estate-
related assets and tenants of our owned properties. We are unable to predict the extent to which the pandemic and related
impacts will continue to adversely impact our business, financial condition, results of operations, liquidity, the market
price of our common stock and our ability to make distributions to our stockholders.”
If we overestimate the yields or incorrectly price the risks of our investments, we may experience losses.
We value our investments based on yields and risks, taking into account estimated future losses on the
mortgage loans and the underlying collateral included in the securitization’s pools, and the estimated impact of these
losses on expected future cash flows and returns. Our loss estimates may not prove accurate, as actual results may vary
from estimates. In the event that we underestimate the asset level losses relative to the price we pay for a particular
investment, we may experience losses with respect to such investment.
Real estate valuation is inherently subjective and uncertain.
The valuation of real estate and therefore the valuation of any underlying security relating to loans made by us
is inherently subjective due to, among other factors, the individual nature of each property, its location, the expected
future rental revenues from that particular property and the valuation methodology adopted. In addition, where we invest
in construction loans, initial valuations will assume completion of the project. As a result, the valuations of the real
estate assets against which we make loans are subject to a degree of uncertainty and are made on the basis of
assumptions and methodologies that may not prove to be accurate, particularly in periods of volatility, low transaction
flow or restricted debt availability in the commercial or residential real estate markets.
Any investments in corporate bank debt and debt securities of commercial real estate operating or finance companies
are subject to the specific risks relating to the particular companies and to the general risks of investing in real
estate - related loans and securities, which may result in significant losses.
We may invest in corporate bank debt and in debt securities of commercial real estate operating or finance
companies. These investments involve special risks relating to the particular company, including its financial condition,
liquidity, results of operations, business and prospects. In particular, the debt securities are often non - collateralized and
may also be subordinated to its other obligations. We also invest in debt securities of companies that are not rated or are
rated non - investment grade by one or more rating agencies. Investments that are not rated or are rated non - investment
grade have a higher risk of default than investment grade rated assets and therefore may result in losses to us. We have
not adopted any limit on such investments.
These investments also subject us to the risks inherent with real estate - related investments, including:
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risks of delinquency and foreclosure, and risks of loss in the event thereof;
the dependence upon the successful operation of, and net income from, real property;
risks generally incident to interests in real property; and
risks specific to the type and use of a particular property.
These risks may adversely affect the value of our investments in commercial real estate operating and finance
companies and the ability of the issuers thereof to make principal and interest payments in a timely manner, or at all, and
could result in significant losses.
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Investments in non - conforming and non - investment grade rated loans or securities involve increased risk of loss.
Many of our investments do not conform to conventional loan standards applied by traditional lenders and
either are not rated or rated as non - investment grade by the rating agencies. The non - investment grade credit ratings for
these assets typically result from the overall leverage of the loans, the lack of a strong operating history for the properties
underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result,
these investments have a higher risk of default and loss than investment grade rated assets. Any loss we incur may be
significant and may reduce distributions to our stockholders and adversely affect the market value of our common stock.
There are no limits on the percentage of unrated or non - investment grade rated assets we may hold in our investment
portfolio.
Any credit ratings assigned to our investments are subject to ongoing evaluations and revisions and we cannot assure
you that those ratings will not be downgraded.
Some of our investments are rated by Moody’s Investors Service, Inc., Fitch Ratings, Inc., S&P Global Ratings,
DBRS, Inc. or Kroll Bond Rating Agency, Inc. Any credit ratings on our investments are subject to ongoing evaluation
by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating
agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower - than - expected rating or
reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value
of these investments could significantly decline, which would adversely affect the value of our investment portfolio and
could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.
The B - Notes that we acquire are subject to additional risks related to the privately negotiated structure and terms of
the transaction, which may result in losses to us.
We invest in B - Notes. A B - Note is a mortgage loan typically (i) secured by a first mortgage on a single large
commercial property or group of related properties and (ii) subordinated to an A - Note secured by the same first
mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for a
B - Note holder after payment to the A - Note holder. However, because each transaction is privately negotiated, B - Notes
can vary in their structural characteristics and risks. For example, the rights of holders of B - Notes to control the process
following a borrower default may vary from transaction to transaction. Further, B - Notes typically are secured by a single
property and so reflect the risks associated with significant concentration. Significant losses related to our B - Notes
would result in operating losses for us and may limit our ability to make distributions to our stockholders.
Our mezzanine loans involve greater risks of loss than senior loans secured by income - producing properties.
We invest in mezzanine loans, which sometimes take the form of subordinated loans secured by second
mortgages on the underlying property or more commonly take the form of loans secured by a pledge of the ownership
interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest
in the entity owning the property. These types of assets involve a higher degree of risk than long - term senior mortgage
lending secured by income - producing real property because the loan may become unsecured as a result of foreclosure by
the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we
may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our
mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower
bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all
of our investment. In addition, mezzanine loans may have higher loan - to - value ratios than conventional mortgage loans,
resulting in less equity in the property and increasing the risk of loss of principal. Significant losses related to our
mezzanine loans would result in operating losses for us and may limit our ability to make distributions to our
stockholders.
Bridge loans involve a greater risk of loss than traditional investment - grade mortgage loans with fully insured
borrowers.
We may acquire bridge loans secured by first lien mortgages on a property to borrowers who are typically
seeking short - term capital to be used in an acquisition, construction or rehabilitation of a property, or other short - term
liquidity needs. The typical borrower under a bridge loan has usually identified an undervalued asset that has been
under - managed and/or is located in a recovering market. If the market in which the asset is located fails to recover
according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or
the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan, and we bear
the risk that we may not recover some or all of our initial expenditure.
In addition, borrowers usually use the proceeds of a conventional mortgage to repay a bridge loan. A bridge
loan therefore is subject to the risk of a borrower’s inability to obtain permanent financing to repay the bridge loan.
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Bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are
not covered by standard hazard insurance. In the event of any default under bridge loans held by us, we bear the risk of
loss of principal and non - payment of interest and fees to the extent of any deficiency between the value of the mortgage
collateral and the principal amount and unpaid interest of the bridge loan. To the extent we suffer such losses with
respect to our bridge loans, the value of our company and the price of our shares of common stock may be adversely
affected.
We purchase securities backed by subprime or alternative documentation residential loans, which are subject to
increased risks.
We own non - agency RMBS backed by collateral pools of mortgage loans that have been originated using
underwriting standards that are less restrictive than those used in underwriting “prime” mortgage loans. These lower
standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans
where the amount of the loan at origination is 80% or more of the value of the mortgaged property, mortgage loans made
to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large
portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified.
Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending
practices, subprime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure,
bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates
that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more
traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans
and alternative documentation (“Alt-A”) mortgage loans, the performance of non - agency RMBS backed by subprime
mortgage loans and Alt-A mortgage loans that we acquire could be correspondingly adversely affected, which could
adversely impact our results of operations, financial condition and business.
We may acquire and sell from time to time residential loans, including “non-QM” loans, which may subject us to
legal, regulatory and other risks, which could adversely impact our business and financial results.
We may from time to time acquire residential loans, including residential loans sometimes referred to as “non-
qualified mortgages” or “non-QMs” that will not have the benefit of enhanced legal protections otherwise available in
connection with the origination of residential loans to a more restrictive credit standard than just determining a
borrower’s ability to repay, as further described below.
The ownership of residential loans, including non-QMs, subjects us to legal, regulatory and other risks,
including those arising under federal consumer protection laws and regulations designed to regulate residential loan
underwriting and originators’ lending processes, standards and disclosures to borrowers. These laws and regulations
include the Consumer Financial Protection Bureau’s (“CFPB”) TILA-RESPA Integrated Disclosure rule (also referred to
as “TRID”), the “ability-to-repay” rules (“ATR Rules”) under the Truth-in-Lending Act and “qualified mortgage”
regulations, in addition to various federal, state and local laws and regulations intended to discourage predatory lending
practices by residential loan originators. The ATR Rules specify the characteristics of a “qualified mortgage” and two
levels of presumption of compliance with the ATR Rules: a safe harbor and a rebuttable presumption for higher priced
loans. The “safe harbor” under the ATR Rules applies to a covered transaction that meets the definition of “qualified
mortgage” and is not a “higher-priced covered transaction.” For any covered transaction that meets the definition of a
“qualified mortgage” and is not a “higher-priced covered transaction,” the creditor or assignee will be deemed to have
complied with the ability-to-repay requirement and, accordingly, will be conclusively presumed to have made a good
faith and reasonable determination of the consumer’s ability to repay. Creditors or assignees will have the benefit of a
rebuttable presumption of compliance with the applicable ATR Rules if they have complied with the qualified mortgage
characteristics of the ATR Rules other than the residential loan being higher-priced in excess of certain thresholds. Non-
QMs, such as residential loans with a debt-to-income ratio exceeding 43%, are among the loan products that we may
acquire that do not constitute qualified mortgages and, accordingly, do not have the benefit of either a safe harbor from
liability under the ATR Rules or a rebuttable presumption of compliance with the ATR Rules. Application of certain
standards set forth in the ATR Rules is highly subjective and subject to interpretive uncertainties. As a result, a court
may determine that a residential loan did not meet the standard or test even if the originator reasonably believed such
standard or test had been satisfied. Failure of residential loan originators or servicers to comply with these laws and
regulations could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these
loans), to monetary penalties assessed by the CFPB through its administrative enforcement authority and by mortgagors
through a private right of action against lenders or as a defense to foreclosure, including by recoupment or setoff of
finance charges and fees collected, and could result in rescission of the affected residential loans, which could adversely
impact our business and financial results. Such risks may be higher in connection with the acquisition of non-QMs.
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Borrowers under non-QMs may be more likely to challenge the analysis conducted under the ATR Rules by lenders.
Even if a borrower does not succeed in the challenge, additional costs may be incurred in connection with challenging
and defending such claims, which may be more costly in judicial foreclosure jurisdictions than in non-judicial
foreclosure jurisdictions, and there may be more of a likelihood such claims are made since the borrower is already
exposed to the judicial system to process the foreclosure.
In addition, when certain of our wholly-owned subsidiaries sell, finance or sponsor securitizations of residential
loans, such subsidiaries may make representations and warranties to the purchaser, the financing provider or to other
third parties regarding, among other things, certain characteristics of those assets, including characteristics sought to be
verified through underwriting and due diligence efforts. In the event of breaches of representations and warranties with
respect to any asset, such subsidiaries may be obligated to repurchase that asset or pay damages or remove that asset
from the borrowing base, as applicable, which may result in a loss. Even if representations and warranties are made by
counterparties from whom we acquired the loans, they may not parallel the representations and warranties our
subsidiaries make or may otherwise not protect us from losses, including, for example, due to the fact that the
counterparty may be insolvent or otherwise unable to make a payment at the time of a claim against such counterparty
for damages for a breach of a representation or warranty.
The residential loans that we may acquire, and that underlie the RMBS we acquire, are subject to risks particular to
investments secured by mortgage loans on residential property. These risks are heightened because we may purchase
non-performing loans.
Residential loans are secured by single-family residential property and are subject to risks of delinquency and
foreclosure and risks of loss. The ability of a borrower to repay a loan secured by a residential property typically is
dependent upon the income and/or assets of the borrower. A number of factors may impair borrowers’ abilities to repay
their loans, including:
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changes in the borrowers’ income or assets;
acts of God, including, without limitation, earthquakes, hurricanes, pandemics, such as the COVID-19
pandemic, and other natural disasters, which may result in uninsured losses;
acts of war or terrorism, including the consequences of such events;
adverse changes in national and local economic and market conditions;
changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental
legislation and the related costs of compliance;
costs of remediation and liabilities associated with environmental conditions; and
the potential for uninsured or under - insured property losses.
In the event of any default under a residential loan held directly by us, we will bear a risk of loss of principal to
the extent of any deficiency between the value of the collateral and the price we paid for the loan and any accrued
interest of the mortgage loan plus advances made, which could have a material adverse effect on our cash flow from
operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be
deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined
by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the
bankruptcy trustee or debtor - in - possession to the extent the lien is unenforceable under state law. Additionally,
foreclosure on a mortgage loan could subject us to greater concentration of the risks of the residential real estate markets
and risks related to the ownership and management of real property.
We may acquire non - agency RMBS, which are backed by residential property but, in contrast to agency
RMBS, their principal and interest are not guaranteed by federally chartered entities such as the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation and, in the case of the Government National
Mortgage Association, the U.S. government. Our investments in RMBS are subject to the risks of default, foreclosure
timeline extension, fraud, home price depreciation and unfavorable modification of loan principal amount, interest rate
and amortization of principal accompanying the underlying residential loans. To the extent that assets underlying our
investments are concentrated geographically, by property type or in certain other respects, we may be subject to certain
of the foregoing risks to a greater extent. In the event of defaults on the residential loans that underlie our investments in
agency RMBS and the exhaustion of any underlying or any additional credit support, we may not realize our anticipated
return on our investments and we may incur a loss on these investments.
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Our inability to promptly foreclose upon defaulted residential loans could increase our cost of doing business and/or
diminish our expected return on investments.
Our ability to promptly foreclose upon defaulted residential loans and liquidate the underlying real property
plays a critical role in our valuation of, and expected return on, those investments. There are a variety of factors that may
inhibit our ability to foreclose upon a residential loan and liquidate the real property within the time frames we model as
part of our valuation process. These factors include, without limitation: federal, state or local legislative action or
initiatives designed to provide homeowners with assistance in avoiding residential loan foreclosures and that serve to
delay the foreclosure process; Home Affordable Modification Program and other programs that require specific
procedures to be followed to explore the refinancing of a mortgage loan prior to the commencement of a foreclosure
proceeding; and continued declines in real estate values and sustained high levels of unemployment that increase the
number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems.
Prepayment rates may adversely affect the value of our investment portfolio.
The value of our investment portfolio is affected by prepayment rates on our mortgage assets. In many cases,
borrowers are not prohibited from making prepayments on their mortgage loans. Prepayment rates are influenced by
changes in interest rates and a variety of economic, geographic and other factors beyond our control, including, without
limitation, housing and financial markets and relative interest rates on fixed rate mortgage loans and adjustable rate
mortgage loans (“ARMs”). Consequently, prepayment rates cannot be predicted.
We generally receive principal payments that are made on our mortgage assets, including residential loans
underlying the agency RMBS or the non - agency RMBS that we acquire. When borrowers prepay their mortgage loans
faster than expected, it results in prepayments that are faster than expected. Faster than expected prepayments could
adversely affect our profitability and our ability to recoup our cost of certain investments purchased at a premium over
par value, including in the following ways:
• We may purchase RMBS that have a higher interest rate than the prevailing market interest rate at the time. In
exchange for this higher interest rate, we may pay a premium over the par value to acquire our mortgage asset.
In accordance with GAAP, we may amortize this premium over the estimated term of our mortgage asset. If our
mortgage asset is prepaid in whole or in part prior to its maturity date, however, we may be required to expense
the allocable portion of the premium at the time of the prepayment.
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Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, making it
unlikely that we would be able to reinvest the proceeds of any prepayment in mortgage assets of similar quality
and terms (including yield). If we are unable to invest in similar mortgage assets, we would be adversely
affected.
While we seek to minimize prepayment risk to the extent practical, in selecting investments we must balance
prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
Interest rate mismatches between our agency RMBS backed by ARMs and our borrowings used to fund our
purchases of these assets may reduce our net interest income and cause us to suffer a loss during periods of rising
interest rates.
To the extent that we invest in agency RMBS backed by ARMs, we may finance these investments with
borrowings that have interest rates that adjust more frequently than the interest rates of those agency RMBS or the
ARMs that back those RMBS. Accordingly, if short - term interest rates increase, our borrowing costs may increase faster
than the interest rates on agency RMBS backed by ARMs adjust. As a result, in a period of rising interest rates, we could
experience a decrease in net income or a net loss. In most cases, the interest rates on our agency RMBS and on our
borrowings will not be identical, thereby potentially creating an interest rate mismatch between our investments and our
borrowings. While the historical spread between relevant short - term interest rate indices has been relatively stable, there
have been periods when the spread between these indices was volatile. During periods of changing interest rates, these
interest rate index mismatches could reduce our net income or produce a net loss, and adversely affect our ability to
make distributions and the market price of our common stock.
In addition, agency RMBS backed by ARMs are typically subject to lifetime interest rate caps which limit the
amount that interest rates can increase through the maturity of the agency RMBS. However, our borrowings under
repurchase agreements typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing
interest rates, the interest rates paid on our borrowings could increase without limitation while caps could limit the
interest rates on these types of agency RMBS. This problem is magnified for agency RMBS backed by ARMs that are
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not fully indexed. Further, some agency RMBS backed by ARMs may be subject to periodic payment caps that result in
a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash
income on these types of agency RMBS than we need to pay interest on our related borrowings. These factors could
reduce our net interest income and cause us to suffer a loss during periods of rising interest rates.
We may invest in distressed and non-performing commercial loans which could subject us to increased risks relative
to performing loans, which may result in losses to us.
We may invest in distressed and non-performing commercial mortgage loans, which are subject to increased
risks of loss. Such loans may be or become non-performing for a variety of reasons, including, without limitation,
because the underlying property is too highly leveraged or the borrower falls upon financial distress, in either case,
resulting in the borrower being unable to meet its debt service obligations. Such loans may require a substantial amount
of workout negotiations and/or restructuring, which may divert attention from other activities and may entail, among
other things, a substantial reduction in the interest rate and a substantial write-down of the principal of the loan.
Moreover, the ability to implement a successful restructuring entails a high degree of uncertainty, and we may not be
able to implement any such restructuring on favorable terms or at all.
The financial or operating difficulties relating to the distressed or non-performing loan may never be overcome
and may cause the borrower to become subject to bankruptcy or other similar administrative proceedings. In connection
with any such proceeding, we may incur substantial or total losses on our investments and may become subject to certain
additional potential liabilities that may exceed the value of our original investment therein. For example, under certain
circumstances, a lender that has inappropriately exercised control over the management and policies of a debtor may
have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such
actions. In addition, under certain circumstances, payments to us may be reclaimed if any such payment is later
determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable
bankruptcy and insolvency laws.
Alternatively, we may find it necessary or desirable to foreclose on one of these loans, and the foreclosure
process may be lengthy and expensive. Borrowers or junior lenders may resist mortgage foreclosure actions by asserting
numerous claims, counterclaims and defenses against us. Any costs or delays involved in the effectuation of a
foreclosure of the loan or a liquidation of the underlying property, or defending challenges brought after the completion
of a foreclosure, will further reduce the proceeds and thus increase our loss.
Some of our portfolio investments are recorded at fair value and, as a result, there is uncertainty as to the value of
these investments.
Some of our portfolio investments are in the form of positions or securities that are not publicly traded. The fair
value of securities and other investments that are not publicly traded may not be readily determinable. We value these
investments quarterly at fair value, as determined in accordance with GAAP, which include consideration of
unobservable inputs. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over
short periods of time and our determinations of fair value may differ materially from the values that would have been
used if a ready market for these securities existed. The value of our common stock could be adversely affected if our
determinations regarding the fair value of these investments were materially higher than the values that we ultimately
realize upon their disposal.
We may experience a decline in the fair value of our assets.
A decline in the fair value of our assets would require us to recognize an unrealized loss against earnings for
those assets that are recorded at fair value through earnings, or may trigger an impairment, credit loss or other charge
against earnings under applicable GAAP for those assets that are not recorded at fair value through earnings if we expect
that the carrying value of those assets will not be recoverable. Subsequent disposition or sale of such assets could further
affect our future losses or gains depending on the actual proceeds received.
Liability relating to environmental matters may impact the value of properties that we may purchase or acquire.
We may be subject to environmental liabilities arising from properties we own. Under various U.S. federal,
state and local laws, an owner or operator of real property may become liable for the costs of removal of certain
hazardous substances released on its property. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the release of such hazardous substances.
The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using
real estate as collateral. To the extent that an owner of a property underlying one of our debt investments becomes liable
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for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect
the value of the relevant mortgage asset held by us and our ability to make distributions to our stockholders.
The presence of hazardous substances on a property we own may adversely affect our ability to sell the property
and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material
environmental liabilities attached to such properties could have a material adverse effect on our results of operations and
financial condition and our ability to make distributions to our stockholders.
We invest in commercial properties subject to net leases, which could subject us to losses.
We invest in commercial properties subject to net leases. Typically, net leases require the tenants to pay
substantially all of the operating costs associated with the properties. As a result, the value of, and income from,
investments in commercial properties subject to net leases will depend, in part, upon the ability of the applicable tenant
to meet its obligations to maintain the property under the terms of the net lease. If a tenant fails or becomes unable to so
maintain a property, we will be subject to all risks associated with owning the underlying real estate. Under many net
leases, however, the owner of the property retains certain obligations with respect to the property, including, among
other things, the responsibility for maintenance and repair of the property, to provide adequate parking, maintenance of
common areas and compliance with other affirmative covenants in the lease. If we were to fail to meet any such
obligations, the applicable tenant could abate rent or terminate the applicable lease, which could result in a loss of our
capital invested in, and anticipated profits from, the property.
We expect that some commercial properties subject to net leases in which we invest generally will be occupied
by a single tenant and, therefore, the success of these investments will be materially dependent on the financial stability
of each such tenant. A default of any such tenant on its lease payments to us would cause us to lose the revenue from the
property and cause us to have to find an alternative source of revenue to meet any mortgage payment and prevent a
foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our
rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If a lease is
terminated, we may also incur significant losses to make the leased premises ready for another tenant and experience
difficulty or a significant delay in re-leasing such property.
In addition, net leases typically have longer lease terms and, thus, there is an increased risk that contractual
rental increases in future years will fail to result in fair market rental rates during those years.
We may acquire these investments through sale-leaseback transactions, which involve the purchase of a
property and the leasing of such property back to the seller thereof. If we enter into a sale-leaseback transaction, our
Manager will seek to structure any such sale-leaseback transaction such that the lease will be characterized as a “true
lease” for U.S. federal income tax purposes, thereby allowing us to be treated as the owner of the property for U.S.
federal income tax purposes. However, we cannot assure you that the Internal Revenue Service (the “IRS”) will not
challenge such characterization. In the event that any such sale-leaseback transaction is challenged and recharacterized
as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery
relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to
satisfy the REIT qualification “asset tests” or “income tests” and, consequently, lose our REIT status effective with the
year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which might
also cause us to fail to meet the REIT distribution requirement for a taxable year.
Investments outside the U.S. that are denominated in foreign currencies subject us to foreign currency risks and to
the uncertainty of foreign laws and markets, which may adversely affect our distributions and our REIT status.
Our investments outside the U.S. denominated in foreign currencies subject us to foreign currency risk due to
potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. As a result, changes in exchange
rates of any such foreign currency to U.S. dollars may affect our income and distributions and may also affect the book
value of our assets and the amount of stockholders’ equity. In addition, these investments subject us to risks of multiple
and conflicting tax laws and regulations, and other laws and regulations that may make foreclosure and the exercise of
other remedies in the case of default more difficult or costly compared to U.S. assets, and political and economic
instability abroad, any of which factors could adversely affect our receipt of returns on and distributions from these
investments.
Changes in foreign currency exchange rates used to value a REIT’s foreign assets may be considered changes in
the value of the REIT’s assets. These changes may adversely affect our status as a REIT. Further, bank accounts in
foreign currency which are not considered cash or cash equivalents may adversely affect our status as a REIT.
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Conditions in Europe and the pending departure of the United Kingdom from the European Union, the exit of any
other member state or the break-up of the European Union entirely, would create uncertainty and could affect our
investments directly.
We currently hold, and may acquire additional, investments that are denominated in Pounds Sterling (“GBP”)
and EURs (including loans secured by assets located in the United Kingdom or Europe), as well as equity interests in
real estate properties located in Europe. European financial markets have experienced volatility and have been adversely
affected by concerns about rising government debt levels, credit rating downgrades and possible default on or
restructuring of government debt. These events have caused bond yield spreads (the cost of borrowing debt in the capital
markets) and credit default spreads (the cost of purchasing credit protection) to increase, most notably in relation to
certain Eurozone countries. The governments of several member countries of the European Union have experienced
large public budget deficits, which have adversely affected the sovereign debt issued by those countries and may
ultimately lead to declines in the value of the Euro.
The United Kingdom ceased to be a member of the EU on January 31, 2020 (“Brexit”). During a prescribed
period (the “Transition Period”), certain transitional arrangements were in effect, such that the United Kingdom
continued to be treated, in most respects, as if it were still a member of the EU, and generally remained subject to EU
law. On December 24, 2020, the EU and the United Kingdom reached an agreement in principle on the terms of certain
agreements and declarations governing the ongoing relationship between the EU and the United Kingdom, including the
EU-UK Trade and Cooperation Agreement (the “TCA”); and, on December 30, 2020, the Council of the European
Union adopted a decision authorizing the signature of the TCA and its provisional application for a limited period
between January 1, 2021 to February 28, 2021, pending ratification of the TCA by the European Parliament (the
“Provisional Period”). The Provisional Period may be extended by mutual agreement between the EU and the United
Kingdom. Legislation to implement the TCA in the UK came into effect beginning on December 31, 2020. The
Transition Period ended on December 31, 2020 and the Provisional Period is now in effect. However, the TCA is
limited in its scope to primarily the trade of goods, transport, energy links and fishing, and uncertainties remain relating
to certain aspects of the UK’s future economic, trading and legal relationships with the EU and with other
countries. The actual or potential consequences of Brexit, and the associated uncertainty, could adversely affect
economic and market conditions in the UK, in the EU and its member states and elsewhere, and could negatively impact
the value of our investments in the UK and more generally contribute to instability in global financial markets, which
could in turn have a material adverse effect on our business, the value of our properties and investments and our
potential growth in Europe, and could amplify the currency risks faced by us.
We invest in equity interests in commercial real estate assets, which subjects us to the general risks of owning
commercial real estate.
We acquire and manage equity interests in commercial real estate assets. The economic performance and value
of these investments can be adversely affected by many factors that are generally applicable to most real estate,
including the following:
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changes in the national, regional, local and international economic climate;
local conditions, such as oversupply of space or a reduction in demand for real estate in the areas in
which they are located;
competition from other available space;
the attractiveness of the real estate to tenants;
increases in operating costs if these costs cannot be passed through to tenants;
the financial condition of tenants and the ability to collect rent from tenants;
vacancies, changes in market rental rates and the need to periodically renovate, repair and re-let space;
changes in interest rates and the availability of financing;
changes in zoning laws and taxation, government regulation and potential liability under
environmental or other laws or regulations;
acts of God, including, without limitation, earthquakes, hurricanes, pandemics, such as the COVID-19
pandemic, and other natural disasters, or acts of war or terrorism, in each case which may result in
uninsured or underinsured losses; and
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decreases in the underlying value of real estate.
Certain significant expenditures associated with an investment in commercial real estate assets (such as
mortgage payments, real estate taxes and maintenance costs) generally do not decline when circumstances cause a
reduction in income from the asset. Because real estate investments are relatively illiquid, our ability to vary any
investments in commercial real estate assets promptly in response to economic or other conditions would be limited.
This relative illiquidity could impede our ability to respond to adverse changes in the performance of such investments.
The value of our equity investments in commercial real estate assets could decrease in the future.
We face risks associated with acquisitions of commercial real estate assets.
Our acquisition of equity interests in commercial real estate assets is subject to, and the success of those assets
may be adversely affected by, various risks, including those described below:
• we may be unable to meet required closing conditions;
• we may be unable to finance acquisitions on favorable terms or at all;
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acquired assets may fail to perform as expected;
our estimates of the costs of repositioning or renovating acquired commercial real estate assets may be
inaccurate;
• we may not be able to obtain adequate insurance coverage for acquired commercial real estate assets;
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acquisitions may be located in markets where we and our Manager have a lack of market knowledge or
understanding of the local economy, lack of business relationships in the area and unfamiliarity with
local governmental and permitting procedures;
• we may be unable to quickly and efficiently integrate new acquisitions of commercial real estate assets
into our existing operations and, therefore, our results of operations and financial condition could be
adversely affected; and
• we may acquire equity interests in commercial real estate assets through a joint venture, and such
investments could be adversely affected by our lack of sole decision-making authority and reliance
upon a co-venturer’s financial condition. In addition, if we co-invest with affiliates of our Manager,
we may be obligated to pay fees to such affiliates and would be subject to a variety of conflicts of
interest with such affiliates, including conflicts similar to those described under the section captioned
“—Risks Related to Our Relationship with Our Manager.”
We make equity investments in commercial real estate assets subject to both known and unknown liabilities and
without any recourse, or with only limited recourse to the seller thereof. As a result, if a liability were asserted against us
arising from our ownership of those assets, we might have to pay substantial sums to settle it, which could adversely
affect us. Unknown liabilities with respect to commercial real estate assets may include:
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claims by tenants, vendors or other persons arising from dealing with the former owners of the assets;
liabilities incurred in the ordinary course of business;
claims for indemnification by general partners, directors, officers and others indemnified by the former
owners of the assets; and
liabilities for clean-up of undisclosed environmental contamination.
Government housing regulations may limit the opportunities at the affordable housing communities in which we
invest, and failure to comply with resident qualification requirements may result in financial penalties or loss of
benefits.
We own, and may acquire additional, equity interests in affordable housing communities and other properties
that benefit from governmental programs intended to provide housing to individuals with low or moderate incomes.
These programs, which are typically administered by the United States Department of Housing and Urban Development
(“HUD”) or state housing finance agencies, typically provide mortgage insurance, favorable financing terms, tax credits
or rental assistance payments to property owners. As a condition of the receipt of assistance under these programs, the
properties must comply with various requirements, which typically limit rents to pre-approved amounts and impose
restrictions on resident incomes. Failure to comply with these requirements and restrictions may result in financial
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penalties or loss of benefits. In addition, we will typically need to obtain the approval of HUD in order to acquire or
dispose of a significant interest in or manage a HUD-assisted property. We may not always receive such approval.
We are subject to the general risks of owning properties relating to the healthcare industry.
We own, and may acquire additional, equity interests in properties relating to the healthcare industry. The
economic performance and value of these properties and of some or all of the tenants/operators of such properties could
be adversely affected by many factors that are generally applicable to properties relating to the healthcare industry,
including the following:
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adverse trends in healthcare provider operations, such as changes in the demand for and methods of
delivering healthcare services, changes in third party reimbursement policies, significant unused
capacity in certain areas, which has created substantial competition for patients among healthcare
providers in those areas, increased expense for uninsured patients, increased competition among
healthcare providers, increased liability insurance expense, continued pressure by private and
governmental payors to reduce payments to providers of services and increased scrutiny of billing,
referral and other practices by federal and state authorities and private insurers;
extensive healthcare regulation, changes in enforcement policies with respect to such regulation and
potential changes in the regulatory framework of the healthcare industry; and
significant legal actions brought against tenants/operators that could subject them to increased
operating costs and substantial uninsured liabilities.
We may sponsor, or purchase the more junior securities of, CLOs and such instruments involve significant risks,
including that these securities receive distributions from the CLO only if the CLO generates enough income to first
pay all the investors holding senior tranches and all CLO expenses.
In August 2019, we entered into a CLO, and in the future we may enter into additional CLOs. In CLOs,
investors purchase specific tranches, or slices, of debt instruments that are secured or backed by a pool of loans. The
CLO debt classes have a specific seniority structure and priority of payments. The most junior securities of a CLO are
generally retained by the sponsor of the CLO and are usually entitled to all of the income generated by the pool of loans
after the payment of debt service on all the more senior classes of debt and the payment of all expenses. Defaults on the
pool of loans therefore first affect the most junior tranches. The subordinate tranches of CLO debt may also experience a
lower recovery and greater risk of loss, including risk of deferral or non-payment of interest than more senior tranches of
the CLO debt because they bear the bulk of defaults from the loans held in the CLO and serve to protect the other, more
senior tranches from default in all but the most severe circumstances. Despite the protection provided by the subordinate
tranches, even more senior CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to
defaults due to collateral default and disappearance of protecting tranches, decline in market value due to market
anticipation of defaults and aversion to CLO securities as a class. Further, the transaction documents relating to the
issuance of CLO securities may impose eligibility criteria on the assets of the CLO, restrict the ability of the CLO’s
sponsor to trade investments and impose certain portfolio-wide asset quality requirements. Finally, the credit risk
retention rules of the SEC impose a retention requirement of 5% of the issued debt classes by the sponsor of the CLO.
These criteria, restrictions and requirements may limit the ability of the CLO’s sponsor (or collateral manager) to
maximize returns on the CLO securities.
In addition, CLOs are not actively traded and are relatively illiquid investments and volatility in CLO trading
markets may cause the value of these investments to decline. The market value of CLO securities may be affected by,
among other things, changes in the market value of the underlying loans held by the CLO, changes in the distributions
on the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying
losses (or foreclosure assets), prepayments on the underlying loans and the availability, prices and interest rate of
underlying loans. Furthermore, the leveraged nature of each subordinated tranche may magnify the adverse impact on
such class of changes in the value of the loans, changes in the distributions on the loans, defaults and recoveries on the
loans, capital gains and losses on the loans (or foreclosure assets), prepayment on loans and availability, price and
interest rates of the loans.
A CLO may include certain interest coverage tests, overcollateralization coverage tests or other tests that, if not
met, may result in a change in the priority of distributions, which may result in the reduction or elimination of
distributions to the subordinate debt and equity tranches until the tests have been met or certain senior classes of
securities have been paid in full. Accordingly, if we hold subordinate debt interests in a CLO that contains such tests and
such tests are not satisfied, we may experience a significant reduction in our cash flow from those interests.
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Furthermore, if any CLO that we sponsor or in which we hold interests fails to meet certain tests relevant to the
most senior debt issued and outstanding by the CLO issuer, an event of default may occur under that CLO. If that occurs,
(i) if we were serving as manager of the CLO, our ability to manage the CLO may be terminated and (ii) our ability to
attempt to cure any defaults in the CLO may be limited, which would increase the likelihood of a reduction or
elimination of cash flow and returns to us in the CLOs for an indefinite time.
Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on
joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners.
We may make investments through joint ventures. Such joint venture investments may involve risks not
otherwise present when we make investments without partners, including the following:
• we may not have exclusive control over the investment or the joint venture, which may prevent us
from taking actions that are in our best interest and could create the potential risk of creating impasses
on decisions, such as with respect to acquisitions or dispositions;
•
•
•
•
•
•
•
joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our
ability to sell the interest when we desire and/or on advantageous terms;
joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate
procedures requiring the other partner to choose between buying the other partner’s interest or selling
its interest to that partner;
a partner may, at any time, have economic or business interests or goals that are, or that may become,
inconsistent with our business interests or goals;
a partner may be in a position to take action contrary to our instructions, requests, policies or
objectives, including our policy with respect to maintaining our qualification as a REIT and our
exemption from registration under the Investment Company Act;
a partner may fail to fund its share of required capital contributions or may become bankrupt, which
may mean that we and any other remaining partners generally would remain liable for the joint
venture’s liabilities;
our relationships with our partners are contractual in nature and may be terminated or dissolved under
the terms of the applicable joint venture agreements and, in such event, we may not continue to own or
operate the interests or investments underlying such relationship or may need to purchase such
interests or investments at a premium to the market price to continue ownership;
disputes between us and a partner may result in litigation or arbitration that could increase our
expenses and prevent our Manager and our officers and directors from focusing their time and efforts
on our business and could result in subjecting the investments owned by the joint venture to additional
risk; or
• we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner
could adversely affect our ability to qualify as a REIT or maintain our exclusion from registration
under the Investment Company Act, even though we do not control the joint venture.
Any of the above may subject us to liabilities in excess of those contemplated and adversely affect the value of
our joint venture investments.
Risks Related to Our Infrastructure Lending Segment
We may not realize all of the anticipated benefits of our prior acquisition of the Infrastructure Lending Segment or
such benefits may take longer to realize than expected.
The success of our prior acquisition of the Infrastructure Lending Segment depends, in part, on our ability to
realize the anticipated benefits from successfully integrating the Infrastructure Lending Segment with our company. The
combination of this business with ours is a complex, costly and time-consuming process. As a result, we are required to
devote significant management attention and resources to integrating the Infrastructure Lending Segment with the rest of
our company. The integration process may disrupt our business and, if implemented ineffectively, could preclude us
from realizing all of the potential benefits we expect to realize with respect to the acquisition. Our failure to meet the
challenges involved in the integration could cause an interruption of, or a loss of momentum in, our business and could
harm our results of operations. In addition, the integration may result in material unanticipated problems, expenses,
42
liabilities, loss of business relationships and diversion of management’s attention, and may cause our stock price to
decline. The difficulties relating to the integration process include, among others:
• managing a new area of business;
•
the potential diversion of management focus and resources from other strategic opportunities and from
operational matters and potential disruption associated with the acquisition;
• maintaining employee morale and retaining key management and other employees;
•
integrating two unique business cultures;
•
•
•
•
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the possibility of faulty assumptions underlying expectations regarding the integration process;
consolidating corporate and administrative infrastructures;
coordinating geographically separate organizations;
unanticipated issues in integrating information technology, communications and other systems;
unanticipated changes in applicable laws and regulations;
• managing tax costs or inefficiencies associated with the integration process; and
•
suffering losses if we do not experience the anticipated benefits of the transaction.
For our prior acquisition of the Infrastructure Lending Segment to be successful, we must retain and motivate key
employees, and failure to do so could seriously harm our business and financial results. In addition, the success of
our acquisition of the Infrastructure Lending Segment depends, in part, on our ability to leverage the capabilities of
Starwood Energy Group and Starwood Oil and Gas.
The success of our prior acquisition of the Infrastructure Lending Segment largely depends on the skills,
experience, industry contacts and continued efforts of management and other key personnel. As a result, for our prior
acquisition of the Infrastructure Lending Segment to be successful, we must retain and motivate executives and other
key employees. Employees from the Infrastructure Lending Segment may experience uncertainty about their future
roles with us until or after strategies relating to the Infrastructure Lending Segment are executed. In addition, the
marketplace for infrastructure debt professionals is highly competitive and other infrastructure debt providers may seek
to recruit our executives and other key employees. These circumstances may adversely affect our ability to retain
executives of the Infrastructure Lending Segment and other key personnel. We also must continue to motivate
employees and keep them focused on our strategies and goals, which effort may be adversely affected as a result of the
uncertainty and difficulties with integrating the Infrastructure Lending Segment with the rest of our company. If we are
unable to retain executives and other key employees, the roles and responsibilities of such executive officers and
employees will need to be filled either by existing or new officers and employees, which may require us to devote time
and resources to identifying, hiring and integrating replacements for the departed executives and employees that could
otherwise be used to integrate the Infrastructure Lending Segment with the rest of our company or otherwise pursue
business opportunities. Moreover, because the marketplace for infrastructure debt professionals is highly competitive,
we may not be able to replace departing employees on a timely basis or at all without incurring significant expense.
In addition, we intend to leverage the existing capabilities of Starwood Energy Group and Starwood Oil and
Gas, affiliates of our Manager, with respect to our existing and future infrastructure debt investments, and our success
depends, in part, on our ability to do so. Neither Starwood Energy Group or Starwood Oil and Gas has an obligation to
provide any services to us, and so our ability to access Starwood Energy Group’s and Starwood Oil and Gas’ existing
capabilities is dependent on our ongoing relationship with our Manager and Starwood Capital Group. See “—Risks
Related to Our Relationship with Our Manager.” Accordingly, we may not continue to have access to Starwood Energy
Group or Starwood Oil and Gas and their respective officers and key personnel.
We are subject to the risks of investing in project finance investments, many of which are outside our control, and
that may negatively impact our business and financial results.
We are subject to the risks of investing in project finance investments. Infrastructure loans are subject to the
risk of default, foreclosure and loss, and the risk of loss may be greater than similar risks associated with loans made on
other types of assets. The loan structure for project finance relies primarily on the underlying project’s cash flows for
repayment, with the project’s assets, rights and interests, together with the equity in the project company, typically
pledged as collateral. Accordingly, the ability of the project company to repay a project finance loan is dependent upon
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the successful development, construction and/or operation of such project rather than upon the existence of independent
income or assets of the project company. Moreover, the loans are typically non-recourse or limited recourse to the
project sponsor, and the project company, as a special purpose entity, typically has no assets other than the
project. Accordingly, if the project’s cash flows are reduced or are otherwise less than projected, the project company’s
ability to repay the loan will likely be impaired. The Infrastructure Lending Segment has made and will continue to
make certain estimates regarding project cash flows during the underwriting of its investments. These estimates may not
prove accurate, as actual results may vary from estimates. A project’s cash flows can be adversely affected by, among
other things:
•
if the project involves new construction,
(cid:131)
(cid:131)
(cid:131)
(cid:131)
(cid:131)
cost overruns,
delays in completion,
availability of land, building materials, energy, raw materials and transportation,
availability of work force, management personnel and reliable contractors, and
natural disasters (fire, drought, flood, earthquake, pandemics, including the COVID-19 pandemic) and war,
civil unrest and strikes affecting contractors, suppliers or markets;
•
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•
•
•
•
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•
•
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shortfalls in expected capacity, output or efficiency;
the terms of the power purchase or other offtake agreements used in the project;
the creditworthiness of the project company and the project sponsor;
competition;
volatility in commodity prices;
technology deployed, and the failure or degradation of equipment;
inflation and fluctuations in exchange rates or interest rates;
operation and maintenance costs;
sufficiency of gas and electric transmission capabilities;
licensing and permit requirements;
increased environmental or other applicable regulations; and
changes in national, international, regional, state or local economic conditions, laws and regulations.
In the event of any default under a project finance loan, we bear the risk of loss of principal to the extent of any
deficiency between the value of the collateral, if any, and the principal and accrued interest of the loan, which could have
a material adverse effect on our business, financial condition and results of operations. In the event of the bankruptcy of
a project company, our investment will be deemed to be subject to the avoidance powers of the bankruptcy trustee or
debtor-in-possession and our contractual rights may be unenforceable under state or other applicable law. Foreclosure
proceedings against a project can be an expensive and lengthy process, which could have a substantial negative effect on
our anticipated return on the foreclosed investment.
The investment portfolio of our Infrastructure Lending Segment is concentrated in the power industry, which
subjects the portfolio to more risks than if the investments were more diversified.
Many of the investments in the portfolio of our Infrastructure Lending Segment are focused in the power
industry, including thermal power and renewable power. If there is a downturn in the U.S. or global power industry
generally, the applicable infrastructure investments may default or not perform in accordance with expectations. In
addition to the factors described above regarding the general risks of investing in project finance, the power industry and
its subsectors can be adversely affected by, among other factors:
• market pricing for electricity;
•
change in creditworthiness of the offtaker;
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•
•
unforeseen capital expenditures;
government regulation and policy change; and
• world and regional events, politics and economic conditions.
In addition to investments focused in the power industry, our portfolio also contains investments related to
projects in the midstream oil and gas industry, which also subjects us to certain risks inherent in the midstream oil and
gas industry.
Loans to power projects or midstream oil and gas projects may be adversely affected if production from the
projects declines. Such declines may be caused by various factors, including, as applicable, decreased access to capital or
loss of economic incentive to complete a project or continue to operate a project, depletion of resources, catastrophic
events affecting production, labor difficulties, political events, environmental proceedings, increased regulations,
equipment failures and unexpected maintenance problems, failure to obtain necessary permits, unscheduled outages,
unanticipated expenses, inability to successfully carry out new construction or acquisitions, import or export supply and
demand disruptions or increased competition from alternative energy sources.
The default of one or more of the infrastructure loans as a result of a downturn within the energy industry
generally, could have a material adverse effect on our business, financial condition and results of operations.
We may have difficulty meeting our obligations on the unfunded commitments of the infrastructure loans, which
could have a material adverse effect on us.
Under certain circumstances, we may find it difficult to meet our remaining funding obligations with the
existing infrastructure loans, or with respect to future infrastructure loans, from our ordinary operations. In such
situations, in order to meet our then-existing funding obligations, we may be required to: (i) sell assets in adverse market
conditions; (ii) borrow on unfavorable terms; or (iii) fund the infrastructure loans with amounts that would otherwise be
invested in future acquisitions, capital expenditures or repayment of debt. These alternatives could increase our costs or
reduce our equity. Thus, compliance with the funding obligations with respect to the infrastructure loans may hinder our
ability to grow, which could have a material adverse effect on our business, financial condition and results of
operations. In the event that we are unable to meet our funding obligations with respect to one or more infrastructure
loans, we would be in breach of such loan(s), which could damage our reputation and could result in a lawsuit being
brought by the project company or others, which could result in substantial costs and divert our attention and resources.
The power industry is subject to extensive regulation, which could adversely impact the business and financial
performance of the projects to which our infrastructure loans relate.
The projects to which our infrastructure loans relate, which are focused in the power industry, are subject to
significant and extensive federal, international, state and local governmental regulation, including how facilities are
constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products
and services they provide. Various governmental authorities have the power to enforce compliance with these
regulations and the permits issued under them, and violators are subject to administrative, civil and criminal penalties,
including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could be enacted in the future
that likely would increase compliance costs, which could adversely affect the business and financial performance of the
projects. Any of the foregoing could result in a default on one or more of our investments, which could have a material
adverse effect on our business, financial condition and results of operations.
We generally are not able to control the projects underlying our infrastructure loans.
Although the covenants in the financing documentation relating to the infrastructure loans generally restrict
certain actions that may be taken by project companies (including restrictions on making equity distributions and
incurring additional indebtedness), we generally are not able to control the projects underlying our infrastructure
loans. As a result, we are subject to the risk that the project company may make business decisions with which we
disagree or that the project company may take risks or otherwise act in ways that do not serve our interests.
Operation of a project underlying an infrastructure loan involves significant risks and hazards that may impair the
project company’s ability to repay the loan, resulting in its default, which could have a material adverse effect on our
business and financial results.
The ongoing operation of a project underlying any of our infrastructure loans involves risks that include, among
other things, the breakdown or failure of equipment or processes or performance below expected levels of output or
efficiency due to wear and tear, latent defect, design error or operator error or force majeure events. In addition to natural
45
risks such as earthquake, flood, drought, lightning, wildfire, hurricane, wind and pandemics, including the COVID-19
pandemic, other hazards, such as fire, explosion, structural collapse and machinery failure, acts of terrorism or related
acts of war, hostile cyber intrusions or other catastrophic events are inherent risks in the operation of a project. These
and other hazards can cause significant personal injury or loss of life, severe damage to and destruction of property, plant
and equipment and contamination of, or damage to, the environment and suspension of operations. Operation of a
project also involves risks that the operator will be unable to transport its product to its customers in an efficient manner
due to a lack of transmission capacity. Unplanned outages of a project, including extensions of scheduled outages due to
mechanical failures or other problems, occur from time to time. Unplanned outages typically increase operation and
maintenance expenses and may reduce revenues. While a project typically maintains insurance, obtains warranties from
vendors and obligates contractors to meet certain performance levels, the proceeds of such insurance, warranties or
performance guarantees may not cover the lost revenues, increased expenses or liquidated damages payments should the
project experience equipment breakdown or non-performance by contractors or vendors. A project’s inability to operate
its assets efficiently, manage capital expenditures and costs and generate earnings and cash flow could have a material
adverse effect on the project company’s ability to repay the loan, which could result in its default. A default on one or
more of the infrastructure loans could have a material adverse effect on our business, financial condition and results of
operations.
Tax considerations relating to the Infrastructure Lending Segment may reduce our net proceeds received from
interest payments.
The Infrastructure Lending Segment is held in one or more domestic or foreign subsidiaries in order to facilitate
our financing of the acquisition of that portfolio and aid in the maintenance of our status as a REIT under the Code. The
domestic subsidiary that initially acquired a significant portion of the pre-existing investment portfolio of the
Infrastructure Lending Segment is disregarded as to our company for U.S. federal income tax purposes and we have
elected to have other foreign and domestic subsidiaries that hold or will hold a portion of the pre-existing portfolio each
treated as a TRS. With respect to newly originated infrastructure loans, we will hold such loans either in a subsidiary
that is disregarded as to our company for U.S. federal income tax purposes or in foreign or domestic TRSs that are
subject to U.S. taxation under the general rules applicable to such corporations. See “—Risks Related to Taxation as a
REIT.”
Certain interest payments to us or to any such domestic or foreign subsidiary made by the underlying borrowers
with respect to the infrastructure loans may be subject to withholding taxes in the jurisdictions in which the related
facilities or borrowers are located, which would reduce the net proceeds from such payments that are received by us.
Risks Related to Our Investing and Servicing Segment
The business activities of our Investing and Servicing Segment, particularly our special servicing business, expose us
to certain risks.
In our Investing and Servicing Segment, we derive a substantial portion of our cash flows from the special
servicing of pools of commercial mortgage loans. As special servicer, we typically receive fees based upon the
outstanding balance of the loans that are being specially serviced by us. The balance of loans in special servicing where
we act as special servicer could decline significantly and as such our servicing fees could likewise decline materially.
The special servicing industry is highly competitive, and our inability to compete successfully with other firms to
maintain our existing servicing portfolio and obtain future servicing opportunities could have a material and adverse
impact on our future cash flows and results of operations. Because the right to appoint the special servicer for securitized
mortgage loans generally resides with the holder of the “controlling class” position in the relevant trust and may migrate
to holders of different classes of securities as additional losses are realized, our ability to maintain our existing servicing
rights and obtain future servicing opportunities may require, in many cases, the acquisition of additional CMBS.
Accordingly, our ability to compete effectively may depend, in part, on the availability of additional debt or equity
capital to fund these purchases. Additionally, our existing servicing portfolio is subject to “run off,” meaning that
mortgage loans serviced by us may be prepaid prior to maturity, refinanced with a mortgage not serviced by us,
liquidated through foreclosure, deed - in - lieu of foreclosure or other liquidation processes or repaid through standard
amortization of principal, resulting in lower servicing fees and/or lower returns on the subordinated securities owned by
us. Improving economic conditions and property prices and declines in interest rates and greater availability of mortgage
financing could reduce the incidence of assets going into special servicing and reduce our revenues from special
servicing, including as a result of lower fees under new arrangements. The fair value of our servicing rights may
decrease under the foregoing circumstances, resulting in losses.
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In connection with the special servicing of mortgage loans, a special servicer may, at the direction of the
directing certificateholder, generally take actions with respect to the specially serviced mortgage loans that could
adversely affect the holders of some or all of the more senior classes of CMBS. We may hold subordinated CMBS and
we may or may not be the directing holder in any CMBS transaction in which we also act as special servicer. We may
have conflicts of interest in exercising our rights as holder of subordinated classes of CMBS and in owning the entity
that also acts as the special servicer for such transactions. It is possible that we, acting as the directing certificateholder
for a CMBS transaction, may direct special servicer actions that conflict with the interests of certain other classes of the
CMBS issued in that transaction. The special servicer is not permitted to take actions that are prohibited by law or that
violate the applicable servicing standard or the terms of the applicable CMBS documentation or the applicable mortgage
loan documentation, and we are subject to the risk of claims asserted by mortgage loan borrowers and the holders of
other classes of CMBS that we have violated applicable law or, if applicable, the servicing standard and our other
obligations under such CMBS documentation or mortgage loan documentation, as a result of actions we may take.
The conduit operations in our Investing and Servicing Segment are subject to volatile market conditions and
significant competition. In addition, the conduit business may suffer losses as a result of ineffective or inadequate hedges
and credit issues.
The business activities in our Investing and Servicing Segment are subject to an evolving regulatory environment that
may affect certain aspects of these activities.
In our Investing and Servicing Segment, we acquire subordinated securities issued by and act as special servicer
for securitizations. As a result of the dislocation of the credit markets, the securitization industry has become subject to
additional regulation. In particular, pursuant to the Dodd - Frank Wall Street Reform and Consumer Protection Act (the
“Dodd - Frank Act”), various federal agencies have promulgated a rule that generally requires issuers in securitizations to
retain 5% of the risk associated with the securities. While the rule as adopted generally allows the purchase of the CMBS
B - Piece by a party not affiliated with the issuer to satisfy the risk retention requirement, current CMBS B - Pieces are
generally not large enough to fully satisfy the 5% requirement. Accordingly, buyers of B - Pieces such as us may be
required to purchase larger B - Pieces, potentially reducing returns on such investments. Furthermore, any such B-Pieces
purchased by a party (such as us) unaffiliated with the issuer generally cannot be transferred for a period of five years
following the closing date of the securitization or hedged against credit risk. These restrictions would reduce our
liquidity and could potentially reduce our returns on such investments.
The mortgage loan servicing activities of our Investing and Servicing Segment are subject to a still evolving set
of regulations, including regulations being promulgated under the Dodd-Frank Act. In addition, various governmental
authorities have increased their investigative focus on the activities of mortgage loan servicers. As a result, we may have
to spend additional resources and devote additional management time to address any regulatory concerns, which may
reduce the resources available to grow our business. In addition, if we fail to operate the servicing activities of our
Investing and Servicing Segment in compliance with existing and future regulations, our business, reputation, financial
condition or results of operations could be materially and adversely affected.
The risks of investment in subordinated CMBS are magnified in the case of our Investing and Servicing Segment,
where the principal payments received by the CMBS trust are made in priority to the higher rated securities.
CMBS are subject to the various risks that relate to the pool of underlying commercial mortgage loans and any
other assets in which the CMBS represents an interest. In addition, CMBS are subject to additional risks arising from the
geographic, property type and other types of concentrations in the pool of underlying commercial mortgage loans, which
risks are magnified by the subordinated nature of the CMBS in which we invest in our Investing and Servicing Segment.
In the event of defaults on the mortgage loans in the CMBS trusts, we bear a risk of loss on our related subordinated
CMBS to the extent of deficiencies between the value of the collateral and the principal, accrued interest and unpaid fees
and expenses on the mortgage loans, which may be offset to some extent by the special servicing fees received by us on
those mortgage loans. The yield to maturity on the CMBS depends largely upon the price paid for the CMBS, which are
generally sold at a discount at issuance and trade at even steeper discounts in the secondary markets. Further, the yield to
maturity on CMBS depends, in significant part, upon the rate and timing of principal payments on the underlying
mortgage loans, including both voluntary prepayments, if permitted, and involuntary prepayments, such as prepayments
resulting from casualty or condemnation, defaults and liquidations or repurchases upon breaches of representations and
warranties or document defects. Any changes in the weighted average lives of CMBS may adversely affect yield on the
CMBS. Prepayments resulting in a shortening of weighted average lives of CMBS may be made at a time of low interest
rates when we may be unable to reinvest the resulting payment of principal on the CMBS at a rate comparable to that
being earned on the CMBS, while delays and extensions resulting in a lengthening of those weighted average lives may
47
occur at a time of high interest rates when we may have been able to reinvest scheduled principal payments at higher
rates.
The exercise of remedies and successful realization of liquidation proceeds relating to commercial mortgage
loans underlying CMBS may be highly dependent on our performance as special servicer. We attempt to underwrite
investments on a “loss - adjusted” basis, which projects a certain level of performance. However, this underwriting may
not accurately predict the timing or magnitude of such losses. To the extent that this underwriting has incorrectly
anticipated the timing or magnitude of losses, our business may be adversely affected. Some of the mortgage loans
underlying the CMBS are in default and additional loans may default in the future. In the case of such defaults, cash
flows of CMBS investments held by us may be adversely affected as any reduction in the mortgage payments or
principal losses on liquidation of any mortgage loan may be applied to the class of CMBS securities relating to such
defaulted loans that we hold.
The market value of CMBS could fluctuate materially as a result of various risks that are out of our control and may
result in significant losses.
The market value of CMBS investments could fluctuate materially over time as the result of changes in
mortgage spreads, treasury bond interest rates, capital market supply and demand factors, and many other factors that
affect high - yield fixed income products. These factors are out of our control and could impair our ability to obtain
short - term financing on the CMBS. CMBS investments, especially subordinated classes of CMBS, may have no, or only
a limited, trading market. The financial markets have experienced and may continue to experience volatility and reduced
liquidity, which may continue and reduce the market value of CMBS. Some or all of the CMBS, especially subordinated
classes of CMBS, may be subject to restrictions on transfer and may be considered illiquid.
Most of the assets in our Investing and Servicing Segment are held through, or are ownership interests in, entities
subject to entity level or foreign taxes, which cannot be passed through to, or used by, our stockholders to reduce
taxes they owe.
Most of the assets in our Investing and Servicing Segment are held through a TRS, which is subject to entity
level taxes on income that it earns. Such taxes have materially increased the taxes paid by our TRSs. In addition, certain
of the assets in our Investing and Servicing Segment include entities organized or assets located in foreign jurisdictions.
Taxes that we or such entities pay in foreign jurisdictions may not be passed through to, or used by, our stockholders as a
foreign tax credit or otherwise.
Our Consolidated Financial Statements changed materially following our acquisition of LNR, as we became required
to consolidate the assets and liabilities of CMBS pools in which we own the controlling class of subordinated
securities and are considered the “primary beneficiary.”
Following our acquisition of LNR, we became required to consolidate the assets and liabilities of certain CMBS
pools in which we own the controlling class of subordinated securities into our financial statements, even though the
value of the subordinated securities may represent a small interest relative to the size of the pool. Under GAAP,
companies are required to consolidate VIEs in which they are determined to be the primary beneficiary. A VIE must be
consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents, has a
potentially significant interest in the entity and controls the entity’s significant decisions. As a result of the foregoing,
our financial statements are more complex and may be more difficult to understand than if we did not consolidate the
CMBS pools.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of deterring a
third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise
could provide the holders of our common stock with the opportunity to realize a premium over the then - prevailing
market price of our common stock. We are subject to the “business combination” provisions of the MGCL that, subject
to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange or, in
circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us
and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then
outstanding voting capital stock or an affiliate or associate of ours who, at any time within the two - year period prior to
the date in question, was the beneficial owner of 10% or more of our then outstanding voting capital stock) or an affiliate
thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the
five - year prohibition, any business combination between us and an interested stockholder generally must be
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recommended by our board of directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to
be cast by holders of outstanding shares of our voting capital stock and (ii) two - thirds of the votes entitled to be cast by
holders of voting capital stock of the corporation other than shares held by the interested stockholder with whom or with
whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested
stockholder. These super - majority voting requirements do not apply if our common stockholders receive a minimum
price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as
previously paid by the interested stockholder for its shares. These provisions of the MGCL also do not apply to business
combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder
becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted business
combinations between us and any other person, provided that such business combination is first approved by our board
of directors (including a majority of our directors who are not affiliates or associates of such person).
The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined
as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable
proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired
in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”)
have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two - thirds of
all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our
officers and our personnel who are also our directors. Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of shares of our stock, but this provision could be amended or
eliminated at any time in the future.
The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval
and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which
(for example, a classified board) we do not yet have. These provisions may have the effect of inhibiting a third party
from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the
circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a
premium over the then current market price.
Our authorized but unissued shares of common and preferred stock may prevent a change in control.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In
addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number
of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify
or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the
classified or reclassified shares. As a result, our board of directors may establish a series of shares of common or
preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for
our shares of common stock or otherwise be in the best interest of our stockholders.
Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on
our operations.
We intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to
register as an investment company under the Investment Company Act. Because we are a holding company that
conducts our businesses primarily through wholly - owned subsidiaries, the securities issued by these subsidiaries that are
excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment
Company Act, together with any other investment securities we own, may not have a combined value in excess of 40%
of the value of our adjusted total assets on an unconsolidated basis. The term “investment securities” generally includes
all securities except U.S. government securities and securities of majority-owned subsidiaries that are not themselves
investment companies and are not relying on the exemption from the definition of investment company under Section
3(c)(1) or Section 3(c)(7) of the Investment Company Act. This requirement limits the types of businesses in which we
may engage through our subsidiaries. In addition, the assets we and our subsidiaries may acquire are limited by the
provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company
Act, which may adversely affect our performance.
If the value of securities issued by our subsidiaries that are excepted from the definition of “investment
company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities
we own, exceeds 40% of our adjusted total assets on an unconsolidated basis, or if one or more of such subsidiaries fail
to maintain an exception or exemption from the Investment Company Act, we could, among other things, be required
either (i) to substantially change the manner in which we conduct our operations to avoid being required to register as an
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investment company or (ii) to register as an investment company under the Investment Company Act, either of which
could have an adverse effect on us and the market price of our securities. If we were required to register as an investment
company under the Investment Company Act, we would become subject to substantial regulation with respect to our
capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as
defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and
industry concentration, and other matters.
We will determine whether an entity is a majority-owned subsidiary of our Company. The Investment
Company Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting
securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such
person. The Investment Company Act defines voting securities as any security presently entitling the owner or holder
thereof to vote for the election of directors of a company. We treat entities in which we own at least 50% of the
outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test referenced above. We have not
requested that the SEC or its staff approve our treatment of any entity as a majority-owned subsidiary, and neither has
done so. If the SEC or its staff was to disagree with our treatment of one or more subsidiary entities as majority-owned
subsidiaries, we would need to adjust our strategy and our assets in order to continue to pass the 40% test.
Many of our subsidiaries rely on the exclusion from the definition of an investment company under Section
3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in [the business of] . . .
purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion, as
interpreted by the SEC staff, generally requires that at least 55% of a subsidiary’s portfolio must be comprised of
qualifying real estate assets and at least 80% of its portfolio must be comprised of qualifying real estate assets and real
estate - related assets (and no more than 20% comprised of miscellaneous assets). In addition, certain of our subsidiaries
in our Infrastructure Lending Segment may seek to rely, among other things, on the exceptions from the definition of
“investment company” contained in Section 3(c)(5)(A) or Section 3(c)(5)(B) of the Investment Company Act. Section
3(c)(5)(A) provides an exception from the definition of “investment company” for entities that are primarily engaged in
the business of purchasing or otherwise acquiring notes, drafts, acceptances, open accounts receivable, and other
obligations representing part or all of the sales price of merchandise, insurance, and services. Section 3(c)(5)(B) excepts
from the definition of “investment company” entities that are primarily engaged in the business of making loans to
manufacturers, wholesalers, retailers and prospective purchasers of specified merchandise, insurance or services.
As with other provisions of the Investment Company Act, including Section 3(c)(5)(C), reliance on Sections
3(c)(5)(A) and/or 3(c)(5)(B) is based in large part on the nature of the assets held by the relevant entities, and we have
analyzed the availability of Section 3(c)(5)(A) and/or 3(c)(5)(B) to certain of our subsidiaries in the Infrastructure
Lending Segment based on guidance from the SEC staff on the types of assets that qualify an entity to rely on either
exception. However, the SEC guidance is somewhat limited in this area and the SEC may in the future issue additional
guidance through no action letters or otherwise and there can be no assurance that the assets of our subsidiaries in the
Infrastructure Lending Segment will conform to such guidance.
In that regard, to the extent that any of such subsidiaries can no longer rely on the above Sections, such
subsidiaries may be required to rely on other exceptions from the definition of “investment company”, such as Section
3(c)(1) or 3(c)(7), in which case we will need to treat our holdings therein as investment securities for purposes of the
40% test described above, or otherwise change the manner in which they conduct operations. Any such change could
have an adverse effect on the performance of such subsidiaries and their ability to conduct their operations as currently
contemplated.
In August 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of
the Investment Company Act, including the nature of the assets that qualify for purposes of the exemption and whether
mortgage REITs should be regulated in a manner similar to investment companies. The laws and regulations governing
the Investment Company Act status of REITs, including the Division of Investment Management of the SEC providing
more specific or different guidance regarding these exemptions, could change in a manner that adversely affects our
operations. If we or our subsidiaries fail to maintain an exception or exemption from the Investment Company Act, we
could, among other things, be required to (i) change the manner in which we conduct our operations to avoid being
required to register as an investment company, (ii) effect sales of our assets in a manner that, or at a time when, we
would not otherwise choose to do so, or (iii) register as an investment company (which, among other things, would
require us to comply with the leverage constraints applicable to investment companies), any of which could negatively
affect the value of our common stock, the sustainability of our business model and our ability to make distributions to
our stockholders, which could, in turn, materially and adversely affect the market price of our common stock.
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Rapid changes in the values of our real estate - related and other investments may make it more difficult for us to
maintain our qualification as a REIT or exemption from the Investment Company Act.
If the market value or income potential of real estate - related or other investments declines as a result of
increased interest rates, prepayment rates or other factors, including changes in carrying value of certain assets made in
accordance with CECL, we may need to increase our real estate investments and income and/or liquidate our
non - qualifying assets in order to maintain our REIT qualification or exemption from the Investment Company Act.
Moreover, we may have to take similar action if the market value or income potential of any investment securities that
we own increases. If the change in real estate or other asset values and/or income occurs quickly, this may be especially
difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non - qualifying assets that we
may own. We may have to make investment decisions that we otherwise would not make absent the REIT and
Investment Company Act considerations.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could
limit your recourse in the event of actions not in your best interests.
Under Maryland law generally, a director’s actions will be upheld if he or she performs his or her duties in good
faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent
person in a like position would use under similar circumstances. In addition, our charter limits the liability of our
directors and officers to us and our stockholders for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the director or officer that was established by a final judgment as being
material to the cause of action adjudicated.
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to
the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director or officer, to the
maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened
to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs
incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our
directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might
exist with other companies.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our
stockholders to effect changes to our management.
Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of
two - thirds of the votes entitled to be cast in the election of directors. Vacancies may be filled only by a majority of the
remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our
management by removing and replacing directors and may prevent a change in control of our company that is in the best
interests of our stockholders.
Ownership limitations may restrict change of control or business combination opportunities in which our
stockholders might receive a premium for their shares.
In order for us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose
include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To
preserve our REIT qualification, our charter generally prohibits any person from directly or indirectly owning more than
9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or
more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common
stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of
our common stock might receive a premium for their shares over the then prevailing market price or which holders
might believe to be otherwise in their best interests.
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Risks Related to Taxation as a REIT
If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation
and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our
stockholders.
We intend to continue to operate in a manner that will allow us to qualify as a REIT for U.S. federal income tax
purposes. We have not requested nor obtained a ruling from the IRS as to our REIT qualification. Qualification as a
REIT involves the application of highly technical and complex Code provisions for which only limited judicial and
administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder
ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis
of the characterization and fair values of our assets, some of which are not susceptible to a precise determination, and for
which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset
requirements also depends upon our analysis of the character of our income and our ability to successfully manage the
composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt
or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the
application of the REIT qualification requirements as described below. In addition, our ability to satisfy the requirements
to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited
influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S.
federal income tax purposes. Accordingly, there can be no assurance that the IRS will not contend that our interests in
subsidiaries or in securities of other issuers will not cause a violation of the REIT requirements.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax and
applicable state and local taxes, on our taxable income at regular corporate rates, and distributions made to our
stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could
be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could
have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Code
provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which
we failed to qualify as a REIT.
Ordinary dividends payable by REITs do not qualify for the reduced tax rates available for some corporate dividends.
The maximum tax rate applicable to “qualified dividends” payable by regular U.S. corporations to domestic
stockholders that are individuals, trusts or estates is currently 20%. Dividends payable by REITs generally are not
eligible for that reduced rate. However, pursuant to the 2017 Tax Cuts and Jobs Act, such domestic stockholders may
generally be allowed to deduct from their taxable income one-fifth of the ordinary dividends payable to them by REITs
for taxable years beginning before January 1, 2026. This would amount to a reduction in the effective tax rate on REIT
dividends as compared to prior law. To qualify for this deduction, the domestic stockholder receiving such dividend
must hold the dividend-paying REIT shares for at least 46 days (taking into account certain special holding period rules)
of the 91-day period beginning 45 days before the shares become ex-dividend, and cannot be under an obligation to
make related payments with respect to a position in substantially similar or related property.
However, the more favorable rates that will nevertheless continue to apply to regular corporate qualified
dividends could cause investors who are individuals, trusts or estates to perceive investments in REITs to be relatively
less attractive as a federal income tax matter than investments in the stocks of non - REIT corporations that pay dividends,
which could adversely affect the value of the stock of REITs, including ours.
REIT distribution requirements could adversely affect our ability to continue to execute our business plan.
We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and
excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute.
To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will
be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a
4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a
minimum amount specified under U.S. federal tax laws. We intend to continue to make distributions to our stockholders
to comply with the REIT requirements of the Code.
From time to time, we may generate taxable income greater than our income for financial reporting purposes
prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual
receipt of cash may occur. For example, we may be required to accrue income from mortgage loans, MBS and other
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types of debt securities or interests in debt securities before we receive any payments of interest or principal on such
assets, including in particular pursuant to requests by borrowers, in light of the current COVID-19 pandemic and
associated economic dislocations, for temporary interest deferrals or forbearances, or other modifications of their loans.
We may also acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the
amendments to the outstanding debt are “significant modifications” under the applicable U.S. Treasury regulations, the
modified debt may be considered to have been reissued to us at a gain in a debt - for - debt exchange with the borrower,
with gain recognized by us to the extent that the principal amount of the modified debt exceeds our cost of purchasing it
prior to modification. In addition, we are generally required to recognize certain amounts in income no later than the
time such amounts are reflected on our financial statements filed with the SEC.
We may also be required under the terms of indebtedness that we incur to use cash received from interest
payments to make principal payments on that indebtedness, with the effect of recognizing income but not having a
corresponding amount of cash available for distribution to our stockholders.
As a result, we may find it difficult or impossible to meet distribution requirements from our ordinary
operations in certain circumstances. In particular, where we experience differences in timing between the recognition of
taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income
could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts
that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable
distribution of our shares, as part of a distribution in which stockholders may elect to receive shares (subject to a limit
measured as a percentage of the total distribution), in order to comply with REIT requirements. These alternatives could
increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow,
which could adversely affect the value of our common stock.
We may choose to make distributions to our stockholders in our own stock, or make a distribution of a subsidiary’s
common stock, in which case our stockholders could be required to pay income taxes in excess of the cash dividends
they receive.
We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at
the election of each stockholder. We may also determine to distribute a taxable dividend in the stock of a subsidiary in
connection with a spin - off or other transaction. Taxable stockholders receiving such distributions will be required to
include the full amount of the distribution as ordinary income to the extent of our current and accumulated earnings and
profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect
to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a
dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the
dividend, depending on the market price of that stock at the time of the sale. Furthermore, with respect to certain
non - U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of
all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders
determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on
the trading price of our common stock.
The stock ownership limit imposed by the Code for REITs and our charter may restrict our business combination
opportunities.
In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our
outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of each taxable year following our first year. Our charter, with certain
exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our
qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of the aggregate
value of our outstanding capital stock. Our board may grant an exemption in its sole discretion, subject to such
conditions, representations and undertakings as it may determine. The ownership limits imposed by the tax law are based
upon direct or indirect ownership by “individuals,” but only during the last half of a tax year. The ownership limits
contained in our charter key off the ownership at any time by any “person,” which term includes entities. These
ownership limitations in our charter are common in REIT charters and are intended to provide added assurance of
compliance with the tax law requirements, and to minimize administrative burdens. However, these ownership limits
might also delay or prevent a transaction or a change in our control that might involve a premium price for our common
stock or otherwise be in the best interest of our stockholders.
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Even as a REIT, we may face tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local
taxes on our income and assets, including taxes on any undistributed income, taxes on income from some activities
conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording
taxes. In addition, in order to continue to meet the REIT qualification requirements, prevent the recognition of certain
types of non - cash income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from
dealer property or inventory, we may hold a significant amount of our assets through our TRSs or other subsidiary
corporations that will be subject to corporate - level income tax at regular rates. In addition, if we lend money to a TRS,
the TRS may be unable to deduct all or a portion of the interest paid to us, which could result in an even higher
corporate - level tax liability. Any of these taxes would decrease cash available for distribution to our stockholders.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for U.S. federal income tax purposes, we must satisfy ongoing tests concerning, among
other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our
stockholders and the ownership of our stock. We may be required to make distributions to stockholders at
disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue
investments that would be otherwise advantageous to us in order to satisfy the source - of - income or asset - diversification
requirements for qualifying as a REIT. In addition, in certain cases, the modification of a debt instrument could result in
the conversion of the instrument from a qualifying real estate asset to a wholly or partially non - qualifying asset that must
be contributed to a TRS or disposed of in order for us to maintain our REIT status. Compliance with the
source - of - income requirements may also limit our ability to acquire debt instruments at a discount from their face
amount. Thus, compliance with the REIT requirements may hinder our ability to make, and in certain cases to maintain
ownership of, certain attractive investments.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our
assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain
mortgage loans and certain kinds of MBS. The remainder of our investment in securities (other than government
securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of
any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general,
no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist
of the securities of any one issuer, and no more than 20% of the value of our total securities can be represented by
securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must
correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to
avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate
from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and
amounts available for distribution to our stockholders.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability
to qualify as a REIT.
We have entered into financing arrangements that are structured as sale and repurchase agreements pursuant to
which we would nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to
repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings
which are secured by the assets sold pursuant thereto. We believe that we would be treated for REIT asset and income
test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding
that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It
is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase
agreement, in which case we could fail to qualify as a REIT.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately
realize from them.
We may acquire debt instruments in the secondary market for less than their face amount. The discount at
which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market
interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for U.S. federal
income tax purposes. Under the rules applicable in reporting market discount as income, such market discount may have
to be included in income as if the debt instruments were assured of being collected in full. If we ultimately collect less
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on the debt instruments than our purchase price plus the market discount we had previously reported as income, we may
not be able to benefit from any offsetting loss deductions. In addition, we may acquire distressed debt investments that
are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant
modifications” under applicable U.S. Treasury regulations, the modified debt may be considered to have been reissued to
us at a gain in a debt - for - debt exchange with the borrower. In that event, we may be required to recognize taxable gain to
the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the
value of the debt or the payment expectations have not changed.
Moreover, some of the MBS that we acquire may have been issued with original issue discount. We will be
required to report such original issue discount based on a constant yield method and will be taxed based on the
assumption that all future projected payments due on such MBS will be made. If such MBS turns out not to be fully
collectible, an offsetting loss deduction will become available only in the later year that collectability is provable.
Finally, in the event that any debt instruments or MBS acquired by us are delinquent as to mandatory principal
and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we
may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as
to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate MBS at
its stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case,
while we would in general ultimately have an offsetting loss deduction available to us when such interest was
determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year
or thereafter.
The “taxable mortgage pool” rules will increase the taxes that we, or our stockholders may, incur and limit our
actions with respect to our taxable mortgage pool.
Securitizations in the form of bonds or notes secured principally by mortgage loans generally result in the
creation of taxable mortgage pools (“TMPs”) for U.S. federal income tax purposes. The debt securities issued by TMPs
are sometimes referred to as “collateralized mortgage obligations” (“CMOs”). We have issued CMOs through a
TMP. Unless a TMP is wholly-owned by a REIT, it is subject to taxation as a corporation. However, so long as a REIT
owns 100% of the equity interests in a TMP, the TMP will not be taxed as a corporation. Instead, certain categories of
the REIT’s stockholders, such as foreign stockholders eligible for treaty or sovereign benefits, stockholders with net
operating losses, and generally tax-exempt stockholders that are subject to unrelated business income tax, may be subject
to taxation, or to increased taxes, on any portion, known as “excess inclusions”, of their dividend income from the REIT
that is attributable to the TMP, but only to the extent that the REIT actually distributes “excess inclusions” to them. We
intend not to distribute “excess inclusions”, but to pay the tax on “excess inclusions” ourselves. Notwithstanding our
intention to try to avoid distributions to our stockholders of “excess inclusions”, it is possible that some portion of our
dividends to our stockholders may be so characterized.
In order to control better, and to attempt to avoid, the distribution of “excess inclusions” to our stockholders,
our TMP is wholly-owned by a subsidiary REIT that has elected to be treated as a REIT. Our subsidiary REIT is
required to satisfy, on a stand-alone basis, the REIT asset, income, organizational, distribution, stockholder ownership
and other requirements described above, and if it were to fail to qualify as a REIT, then (i) our subsidiary REIT would
face adverse tax consequences similar to those described above with respect to our qualification as a REIT and (ii) such
failure could have an adverse effect on our ability to comply with the REIT income and asset tests and thus could impair
our ability to qualify as a REIT unless we could avail ourselves of certain relief provisions.
Because our TMP must at all times be owned by a REIT, we are restricted from selling equity interests in it, or
selling any notes or bonds issued by it that might be considered to be equity for tax purposes, to other investors if doing
so would subject it to taxation. These restrictions limit the liquidity of our investment in our TMP and may prevent us
from incurring greater leverage on that investment in order to maximize our returns from it.
The tax on prohibited transactions may limit our ability to engage in transactions, including certain methods of
securitizing mortgage loans, which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions
are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily
for sale to customers in the ordinary course of business. We might be subject to this tax if we were to dispose of or
securitize loans in a manner that was treated as a sale of the loans for U.S. federal income tax purposes. Therefore, in
order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level,
and may limit the structures we utilize for our securitization transactions, even though the sales or structures might
otherwise be beneficial to us.
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Our investments in construction loans require us to make estimates about the fair value of land improvements that
may be challenged by the IRS.
We invest in construction loans, the interest from which is qualifying income for purposes of the REIT income
tests, provided that the loan value of the real property securing the construction loan is equal to or greater than the
highest outstanding principal amount of the construction loan during any taxable year. For purposes of construction
loans, the loan value of the real property is the fair value of the land plus the reasonably estimated cost of the
improvements or developments (other than personal property) that secure the loan and that are to be constructed from the
proceeds of the loan. There can be no assurance that the IRS would not challenge our estimate of the loan value of the
real property.
The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.
We invest in mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law.
Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate
asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying
mortgage interest for purposes of the REIT 75% income test. We may acquire mezzanine loans that do not meet all of
the requirements of this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor, the IRS
could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a
challenge were sustained, we could fail to qualify as a REIT.
Liquidation of assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we
are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant
gain if we sell assets that are treated as dealer property or inventory.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income
from a hedging transaction we enter into either (i) to manage risk of interest rate or price changes with respect to
borrowings made or to be made to acquire or carry real estate assets, (ii) to manage risk of currency fluctuations with
respect to items of income that qualify for purposes of the REIT 75% or 95% gross income tests or assets that generate
such income or (iii) to hedge another instrument that hedges risks described in clause (i) or (ii) for a period following the
extinguishment of the liability or the disposition of the asset that was previously hedged by the instrument, and provided
that, in each case, the applicable hedging instrument is properly identified under applicable U.S. Treasury regulations,
does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into
other types of hedging transactions, the income from those transactions is likely to be treated as non - qualifying income
for purposes of both of the gross income tests. As a result of these rules, we intend to limit our use of advantageous
hedging techniques or implement those hedges through a domestic TRS. This could increase the cost of our hedging
activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in
interest rates than we would otherwise want to bear. In addition, losses in our TRS will not directly reduce our REIT
taxable income but may reduce current or future taxable income in the TRS.
Partnership tax audits could increase the tax liability borne by us in the event of a U.S. federal income tax audit of a
subsidiary partnership.
In connection with U.S. federal income tax audits of partnerships (such as certain of our subsidiaries) and the
collection of any tax resulting from any such audits or other tax proceedings, the partnership itself may be liable for
partner-level taxes (including interest and penalties) resulting from an adjustment of partnership tax items on audit,
regardless of changes in the composition of the partners (or their relative ownership) between the year under audit and
the year of the adjustment. The rules also include an elective alternative method under which the additional taxes
resulting from the adjustment are assessed from the affected partners, subject to a higher rate of interest than otherwise
would apply. Although regulations have been issued and address some aspects of these rules, questions remain as to
how they will apply. These rules could increase the U.S. federal income tax, interest, and/or penalties economically
borne by us in the event of a U.S. federal income tax audit of a subsidiary partnership in comparison to prior law.
Legislative or other actions affecting REITs could materially and adversely affect us and our stockholders.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without
56
retroactive application, could materially and adversely affect us and our stockholders. We cannot predict how changes in
the tax laws might affect us or our stockholders. New legislation, U.S. Treasury regulations, administrative
interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the U.S.
federal income tax consequences of such qualification.
General Risk Factors
Changes in accounting rules and other policy or regulatory changes could occur at any time and could impact us in
significantly negative ways that we are unable to predict or protect against.
The SEC, the Financial Accounting Standards Board (“FASB”) and other regulatory bodies that establish the
accounting rules applicable to us have proposed or enacted a wide array of changes to accounting rules over the last
several years. Moreover, in the future, these regulators may propose additional changes that we do not currently
anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial
performance in negative ways that we cannot predict or protect against. We cannot predict whether any changes to
current accounting rules will occur or what impact any codified changes will have on our business, results of operations,
liquidity or financial condition.
The recent change in the U.S. Presidential Administration and changes in Congress could result in significant
policy changes or regulatory uncertainty in our industry. While it is not possible to predict when and whether significant
policy or regulatory changes would occur, any such changes on the federal, state or local level could significantly
impact, among other things, our operating expenses, the availability of financing, interest rates, the economy and the
geopolitical landscape. To the extent that the new government administration takes action by proposing and/or passing
regulatory policies that could have a negative impact on our industry, such actions may have a material adverse effect on
our business, results of operations, liquidity and financial condition.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes - Oxley Act could have a material adverse effect on our business and stock price.
As a public company, we are required to maintain effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes - Oxley Act of 2002. Internal control over financial reporting is complex and
may be revised over time to adapt to changes in our business or changes in applicable accounting rules. We cannot
assure you that our internal control over financial reporting will be effective in the future or that a material weakness will
not be discovered with respect to a prior period for which we believe that internal controls were effective. If we are not
able to maintain or document effective internal control over financial reporting, our independent registered public
accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting as of the
required dates. Matters impacting our internal controls may cause us to be unable to report our financial information on a
timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse
regulatory consequences, including sanctions or investigations by the SEC or violations of applicable stock exchange
listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us
and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to
suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over
financial reporting. This could materially and adversely affect us by, for example, leading to a decline in our stock price
and impairing our ability to raise capital.
Our board of directors has approved very broad investment guidelines for our Manager and does not approve each
investment and financing decision made by our Manager unless required by our investment guidelines.
Our Manager is authorized to follow very broad investment guidelines which enable our Manager to make
investments on our behalf in a wide array of assets. Our board of directors will periodically review our investment
guidelines and our investment portfolio but will not, and will not be required to, review all of our proposed investments,
except that any investment that is equal to or in excess of $250 million but less than $400 million will require approval
of the investment committee of our board of directors and any investment that is equal to or in excess of $400 million
will require approval of our board of directors. In addition, in conducting periodic reviews, our board of directors may
rely and may make investments through affiliates primarily on information provided to them by our Manager.
Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly,
difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager (or such
affiliates) has great latitude within the broad parameters of our investment guidelines in determining the types and
amounts of target assets it decides are attractive investments for us, which could result in investment returns that are
substantially below expectations or that result in losses, which would materially and adversely affect our business
57
operations and results. Further, decisions made and investments and financing arrangements entered into by our Manager
may not fully reflect the best interests of our stockholders.
New investments may not be profitable (or as profitable as we expect), may increase our exposure to certain
industries, may increase our exposure to interest rate, foreign currency, real estate market or credit market fluctuations,
may divert managerial attention from more profitable opportunities and may require significant financial resources. A
change in our investment strategy may also increase any guarantee obligations we agree to incur or increase the number
of transactions we enter into with affiliates. Moreover, new investments may present risks that are difficult for us to
adequately assess, given our lack of familiarity with a particular type of investment. The risks related to new investments
or the financing risks associated with such investments could adversely affect our results of operations, financial
condition and liquidity, and could impair our ability to make distributions to our stockholders.
Our board of directors has in the past and may in the future at any time change one or more of our investment
strategy or guidelines, financing strategy or leverage policies without stockholder consent.
Our board of directors has in the past and may in the future at any time change one or more of our investment
strategy or guidelines, financing strategy or leverage policies with respect to investments, acquisitions, growth,
operations, indebtedness, capitalization and distributions without the consent of our stockholders, which could result in
an investment portfolio with a different risk profile. Any change in our investment strategy may increase our exposure to
interest rate risk, default risk and real estate market fluctuations. These changes could adversely affect our financial
condition, results of operations, the market price of our common stock and our ability to make distributions to our
stockholders.
We operate in a highly competitive market for investment opportunities and competition may limit our ability to
acquire desirable investments in our target assets and could also affect the pricing of these investment opportunities.
We operate in a highly competitive market for investment opportunities. Our profitability depends, in large part,
on our ability to acquire our target assets at attractive prices. In acquiring our target assets, we compete with a variety of
institutional investors, including other REITs, commercial and investment banks, specialty finance companies, public
and private funds (including other funds managed by Starwood Capital Group), commercial finance and insurance
companies and other financial institutions. Many of our competitors are substantially larger and have considerably
greater financial, technical, marketing and other resources than we do. Several other REITs have raised significant
amounts of capital and may have investment objectives that overlap with ours, which may create additional competition
for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that may
not be available to us, such as funding from the U.S. government, if we are not eligible to participate in programs
established by the U.S. government. Many of our competitors are not subject to the operating constraints associated with
REIT tax compliance or maintenance of an exemption from the Investment Company Act. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider
variety of investments and establish more relationships than we do. Furthermore, competition for investments in our
target assets may lead to the price of such assets increasing, which may further limit our ability to generate desired
returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our
business, financial condition and results of operations. Also, as a result of this competition, desirable investments in our
target assets may be limited in the future and we may not be able to continue to take advantage of attractive investment
opportunities from time to time, as we may not be able to identify and make additional investments that are consistent
with our investment objectives.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which
may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our
stockholders.
Our network systems and storage applications, and those systems and storage and other business applications
maintained by our third party providers, may be subject to attempts to gain unauthorized access, breach, malfeasance or
other system disruptions. In some cases, it is difficult to anticipate or to detect immediately such incidents and the
damage caused thereby. While we continually work to safeguard our internal network systems and validate the security
of our third party providers, including through information security policies and employee awareness and training, such
actions may not be sufficient to prevent cyber-attacks or security breaches. The loss, disclosure or misappropriation of,
or unauthorized access to, information or our failure to meet our obligations could result in legal claims or proceedings,
penalties and remediation costs. A significant data breach or our failure to meet our obligations may adversely affect our
reputation, business, results of operations and financial condition.
58
In particular, our business is highly dependent on the communications and information systems of Starwood
Capital Group. Any failure or interruption of Starwood Capital Group’s systems could cause delays or other problems,
which could have a material adverse effect on our operating results and negatively affect the market price of our
common stock and our ability to make distributions to our stockholders.
We are subject to risks from natural disasters such as earthquakes and severe weather, which may result in
damage to our properties.
Natural disasters and severe weather such as earthquakes, tornadoes, hurricanes or floods may result in
significant damage to our properties. The extent of our casualty losses and loss in operating income in connection with
such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have
geographic concentration of exposures, a single catastrophe (such as an earthquake) or destructive weather event (such
as a hurricane) affecting a region may have a significant negative effect on our financial condition and results of
operations. We may be materially and adversely affected by our exposure to losses arising from natural disasters or
severe weather.
The market price and trading volume of our common stock could be volatile and the market price of our common
stock could decline, resulting in a substantial or complete loss of your investment.
The stock markets, including the NYSE, which is the exchange on which our common stock is listed, have
experienced significant price and volume fluctuations. In the past, overall weakness in the economy and other factors
have contributed to extreme volatility of the equity markets generally, including the market price of our common stock.
As a result, the market price of our common stock has been and may continue to be volatile, and investors in our
common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating
performance or prospects. Some of the factors that could negatively affect our stock price or result in fluctuations in the
price or trading volume of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business
strategy or prospects;
actual or perceived conflicts of interest with our Manager or Starwood Capital Group and individuals, including
our executives;
equity issuances by us or share resales by our stockholders, or the perception that such issuances or resales may
occur;
actual or anticipated accounting problems;
publication of research reports about us or the real estate industry;
changes in market valuations of similar companies;
adverse market reaction to the level of leverage we employ;
additions to or departures of our Manager’s or Starwood Capital Group’s key personnel;
speculation in the press or investment community;
our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts;
increases in market interest rates, which may lead investors to demand a higher distribution yield for our
common stock and would result in increased interest expenses on our debt;
failure to maintain our REIT qualification;
uncertainty regarding our exemption from the Investment Company Act;
price and volume fluctuations in the stock market generally; and
general market and economic conditions, including the current state of the credit and capital markets.
In the past, securities class action litigation has often been instituted against companies following periods of
volatility in their share price. This type of litigation could result in substantial costs and divert our attention and
resources.
59
There may be future dilution of our common stock as a result of additional issuances of our securities, which could
adversely impact our stock price.
Our board of directors is authorized under our charter to, among other things, authorize the issuance of
additional shares of our common stock or the issuance of shares of preferred stock or additional securities convertible or
exchangeable into equity securities, without stockholder approval. Future issuances of our common stock or shares of
preferred stock or securities convertible or exchangeable into equity securities may dilute the ownership interest of our
existing stockholders. Because our decision to issue additional equity or convertible or exchangeable securities in any
future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future issuances. Additionally, any convertible or exchangeable securities that we issue
may have rights, preferences and privileges more favorable than those of our common stock. Also, we cannot predict the
effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of
our common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may
adversely affect the prevailing market price for our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company leases office space in Miami Beach, FL; New York, NY; Los Angeles, CA; Stamford, CT and
Charlotte, NC. Our headquarters is located in Greenwich, CT in office space leased by our Manager. Refer to Schedule
III included in Item 8 of this Form 10 - K for a listing of investment properties owned as of December 31, 2020.
Item 3. Legal Proceedings.
Currently, no material legal proceedings are pending against us that could have a material adverse effect on our
business, financial position or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
60
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities.
Market Information and Dividends
The Company’s common stock has been listed on the NYSE and is traded under the symbol “STWD” since its
IPO in August 2009. On February 19, 2021, the closing price of our common stock, as reported by the NYSE, was
$22.10 per share.
We intend to make regular quarterly distributions to holders of our common stock and distribution equivalents
to holders of restricted stock units which are settled in shares of common stock. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for
dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually
distributes less than 100% of its net taxable income. We generally intend over time to pay quarterly distributions in an
amount at least equal to our taxable income. Refer to Note 17 to the Consolidated Financial Statements for the
Company’s dividend history for the three years ended December 31, 2020.
Holders
As of February 19, 2021, there were 422 holders of record of the Company’s 285,450,156 shares of common
stock outstanding. One of the holders of record is Cede & Co., which holds shares as nominee for The Depository Trust
Company which itself holds shares on behalf of other beneficial owners of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is set forth under Item 12 of this Form 10 - K and is incorporated herein by
reference.
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Stock Performance Graph
CUMULATIVE TOTAL RETURN
Based upon initial investment of $100 on December 31, 2015(1)
220.00
200.00
180.00
160.00
140.00
120.00
100.00
80.00
Bloomberg REIT Mortgage Index
Starwood Property Trust, Inc
S&P ©500
12/31/2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
100.00 $
116.89 $
123.94 $
125.28 $
167.85 $
149.13 $
(1) Dividend reinvestment is assumed.
Sales of Unregistered Equity Securities
Starwood Property
Trust
S&P © 500
Bloomberg REIT
Mortgage Index
100.00
122.27
147.05
142.77
176.50
137.32
100.00 $
111.96 $
136.40 $
130.42 $
171.49 $
203.04 $
During the year ended December 31, 2020, we issued 62,323 Class A Units in connection with the acquisition
of the Woodstar II Portfolio as discussed in Note 3 to the Consolidated Financial Statements.
The Class A Unitholders have the right to redeem their Class A Units for cash or, in the sole discretion of the
Company, shares of the Company’s common stock on a one-for-one basis, subject to certain anti-dilution adjustments. In
connection with the issuance of the Class A Units, the Class A Unitholders received certain registration rights with
respect to the shares of the Company’s common stock, if any, issued upon the redemption of Class A Units.
The Class A Units were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the
Securities Act of 1933.
62
Issuer Purchases of Equity Securities
The following table provides information regarding our purchases of common stock during the quarter ended
December 31, 2020:
Period
November 2020 . . . . . . . . . . . .
Total number of
shares purchased price per share
Average
repurchase
Number of shares
purchased as part of
publicly announced
program (1)
Value of shares available
for purchase
under the program
(in thousands)
343,130 $
14.55
343,130 $
366,217
(1) In February 2020, our board of directors authorized the repurchase of up to $400.0 million of our outstanding
common shares and convertible senior notes over a period of one year.
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements, including
the notes thereto, included elsewhere herein. All amounts are in thousands, except per share data.
2020
For the year ended December 31,
2018
2017
2019
Operating Data:
Revenues (1) . . . . . . . . . . . . . . . . . . . . . . . $ 1,136,155 $ 1,196,419 $ 1,109,280 $
Costs and expenses . . . . . . . . . . . . . . . . . .
Other income (2) . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Starwood
Property Trust, Inc. . . . . . . . . . . . . . . . . .
Earnings per share:
1,029,824
383,572
(13,232)
536,935
536,935
977,632
294,879
(15,330)
411,197
411,197
964,408
214,531
(20,197)
366,081
366,081
385,830
509,664
331,689
2016
784,667
651,127
242,455
(8,344)
367,651
367,651
879,888 $
735,249
299,650
(31,522)
412,767
412,767
400,770
365,186
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.16 $
1.16 $
1.81 $
1.79 $
1.44 $
1.42 $
1.53 $
1.52 $
1.52
1.50
1.92 $
1.92 $
1.92 $
281,978
Dividends declared per share of
common stock . . . . . . . . . . . . . . . . . . . . . $
Weighted-average basic shares of
common stock outstanding . . . . . . . . . . .
Balance Sheet Data:
Investments in loans . . . . . . . . . . . . . . . . . $ 12,139,908 $ 11,470,224 $ 9,794,254 $ 7,382,641 $ 5,946,274
807,618
Investments in securities (3) . . . . . . . . . . .
1,944,720
Investments in properties . . . . . . . . . . . . .
77,256,266
Total assets (4) . . . . . . . . . . . . . . . . . . . . . .
6,200,670
Total financing arrangements . . . . . . . . . .
Total liabilities (4) . . . . . . . . . . . . . . . . . . .
72,696,193
Total Starwood Property Trust, Inc.
Stockholders’ Equity . . . . . . . . . . . . . . . .
4,522,274
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . $ 4,862,576 $ 5,137,014 $ 4,900,189 $ 4,579,201 $ 4,560,073
810,238
2,266,440
78,042,336
11,762,730
72,905,322
718,203
2,647,481
62,941,289
7,972,476
58,362,088
906,468
2,784,890
68,262,453
10,756,635
63,362,264
736,658
2,271,153
80,873,509
12,809,264
76,010,933
4,603,432
4,478,414
4,700,425
4,488,898
1.92 $
265,279
259,620
279,337
238,529
1.92
(1) During the years ended December 31, 2020, 2019, 2018, 2017 and 2016, servicing fees and interest income of
$133.3 million, $144.7 million, $147.1 million, $179.4 million and $180.5 million, respectively, were eliminated in
consolidation pursuant to ASC 810.
(2) During the years ended December 31, 2020, 2019, 2018, 2017 and 2016, other income included $133.5 million,
$145.0 million, $148.0 million, $186.1 million and $181.2 million, respectively, of additive net eliminations in
consolidation pursuant to ASC 810.
63
(3) December 31, 2020, 2019, 2018, 2017 and 2016 balances exclude $1.4 billion, $1.4 billion, $1.2 billion, $1.0 billion
and $959.0 million, respectively, of CMBS and RMBS that were eliminated in consolidation pursuant to ASC 810.
(4) December 31, 2020 balances include $64.2 billion of VIE assets and $62.8 billion of VIE liabilities consolidated
pursuant to ASC 810. December 31, 2019 balances include $62.2 billion of VIE assets and $60.7 billion of VIE
liabilities consolidated pursuant to ASC 810. December 31, 2018 balances include $53.4 billion of VIE assets and
$52.2 billion of VIE liabilities consolidated pursuant to ASC 810. December 31, 2017 balances include $51.0 billion
of VIE assets and $50.0 billion of VIE liabilities consolidated pursuant to ASC 810. December 31, 2016 balances
include $67.1 billion of VIE assets and $66.1 billion of VIE liabilities consolidated pursuant to ASC 810.
Item 7. 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” of the
Company should be read in conjunction with Item 6, “Selected Financial Data,” and our accompanying Consolidated
Financial Statements included in Item 8 of this Form 10 - K. Certain statements we make under this Item 7 constitute
“forward - looking statements” under the Private Securities Litigation Reform Act of 1995. See “Special Note Regarding
Forward - Looking Statements” preceding Part I of this Form 10 - K. You should consider our forward - looking statements
in light of our Consolidated Financial Statements and other financial information appearing elsewhere in this Form 10 - K
and our other filings with the SEC.
Business Objectives and Outlook
Our objective is to provide attractive risk - adjusted returns to our investors over the long - term, primarily
through dividends and secondarily through capital appreciation. We intend to achieve our objective by originating and
acquiring target assets to create a diversified investment portfolio that is financed in a manner that is designed to deliver
attractive returns across a variety of market conditions and economic cycles. We are focused on our three core
competencies: transaction access, asset analysis and selection, and identification of attractive relative values within the
real estate debt and equity markets.
Since our IPO in August 2009, we have evolved from a company focused on opportunistic acquisitions of real
estate debt assets from distressed sellers to that of a full - service real estate finance platform that is primarily focused on
the origination and acquisition of commercial real estate debt and equity investments across the capital structure, in both
the U.S. and Europe. With the Starwood brand, market presence, and lending/asset management platform that we have
developed, we are focused primarily on the following opportunities:
(1) Continue to expand our market presence as a leading provider of acquisition, refinance, development and
expansion capital to large real estate projects (greater than $75 million) in infill locations, and other
attractive market niches where our size and scale give us an advantage to provide a “one - stop” lending
solution for real estate developers, owners and operators;
(2) Continue to expand our investment activities in subordinate CMBS and revenues from special servicing;
(3) Continue to expand our capabilities in syndication and securitization, which serve as a source of
attractively priced, matched - term financing;
(4) Continue to leverage our Investing and Servicing Segment’s sourcing and credit underwriting capabilities
to expand our overall footprint in the commercial real estate debt markets;
(5) Expand our investment activities in both (i) targeted real estate equity investments and (ii) residential
mortgage finance; and
(6) Expand our originations and acquisitions of infrastructure debt investments.
64
COVID-19 Pandemic
The outbreak of COVID-19 beginning in the first quarter of 2020 and its continuing impact on the financial,
economic and capital markets environment, and future developments in these and other areas, present uncertainty and
risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. We expect
that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid
development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on
economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the
performance of our investments. The full extent of the impact and effects of COVID-19 will depend on future
developments, including, among other factors, the duration and spread of the outbreak, along with related travel
advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of
labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the
global economic slowdown.
Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity,
the market price of our common stock and our ability to make distributions to our stockholders from the COVID-19
pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of this Form 10-K.
Asset Performance and Collections
We maintain an in-house team of asset management professionals who oversee our commercial loans and are in
regular communication with these borrowers. We have utilized these relationships to address the potential impacts of
the COVID-19 pandemic on the assets which secure our loans, particularly hospitality assets. Some of our borrowers
have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business
plans, have had to temporarily close their businesses, or have experienced other negative business consequences which
have led to cash flow pressures at the underlying properties. In some cases, these borrowers have requested temporary
interest deferral or forbearance, or other modifications of their loans.
Since the outbreak of the COVID-19 pandemic, we have granted certain payment related loan modifications to
our borrowers, consisting principally of partial and temporary deferrals of interest and the repurposing of reserves, many
of which were coupled with additional equity commitments from sponsors. We are generally encouraged by our
borrowers’ response to the COVID-19 pandemic’s impacts on their properties. While we believe the principal amounts
of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the
entire principal value of certain investments. As of December 31, 2020, we had five loans with an aggregate principal
balance of $699.7 million which remained on their post-COVID partial interest deferrals.
Within residential lending, we continue to monitor the impact of forbearance arrangements granted by our
master servicer for loans which have been securitized. In securitized transactions with advancing arrangements, the
master servicer has advanced 100% of all unpaid principal and interest.
In our property segment, we collected 98% of rents due during the year ended December 31, 2020. Collections
were particularly strong in our Woodstar I and Woodstar II affordable housing portfolios, where 98% of rent due was
collected. Given current demographic trends, which tend to favor flexible rental arrangements, we continue to see
sustained demand in multifamily and decreased turnover.
In our infrastructure segment, during the year ended December 31, 2020, we collected 100% of interest due and
did not grant any payment related loan modifications.
Goodwill and Intangible Assets
Goodwill is tested for impairment annually in the fourth quarter, or more frequently if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying
amount. Management considered the general economic decline and the impact of the COVID-19 pandemic in its fourth
quarter 2020 goodwill impairment testing, and concluded that goodwill was not impaired as of December 31,
2020. However, future changes in the expectations of the impact of COVID-19 on our operations, financial performance
and cash flows could cause our goodwill to be impaired.
65
Recent Developments
Developments During the Fourth Quarter of 2020
Commercial and Residential Lending Segment
• Originated $453.5 million of commercial loans during the quarter, including the following:
o £89 million ($119.8 million) first mortgage loan for an office portfolio located in Ireland, which the
Company fully funded.
o $109.8 million first mortgage and mezzanine loan for the construction of a 27-story waterfront
residential building located in Florida, of which the Company funded $2.2 million.
o $105.0 million first mortgage loan for the refinancing of a 347-unit Class A multifamily building
located in California, of which the Company funded $102.3 million.
o $63.3 million first mortgage and mezzanine loan for the refinancing of a data center located in Florida,
which the Company fully funded and sold the $47.0 million first mortgage loan.
• Funded $333.6 million of previously originated commercial loan commitments.
• Received gross proceeds of $250.6 million ($131.9 million, net of debt repayments) from maturities and
principal repayments on our commercial loans.
• Received gross proceeds of $46.8 million from sales of senior interests in first mortgage loans.
• Acquired $323.1 million of residential loans, of which $176.6 million related to loans acquired through a
consolidated securitization unwind.
• Received proceeds of $338.8 million, including retained RMBS of $24.6 million, from the securitization of
$326.8 million of residential loans.
• Received proceeds of $135.6 million from the sale of RMBS.
Infrastructure Lending Segment
• Originated or acquired $80.6 million of infrastructure loans and funded $21.7 million of pre-existing
infrastructure loan commitments.
• Received proceeds of $22.4 million from sales of infrastructure loans and $102.7 million from maturities and
principal repayments on our infrastructure loans and bonds.
Investing and Servicing Segment
• Originated commercial conduit loans of $257.7 million. Separately, received proceeds of $465.7 million from
sales of previously originated commercial conduit loans.
• Acquired CMBS for a purchase price of $41.7 million and sold CMBS for total gross proceeds of $5.6 million.
• Obtained two new special servicing assignments for CMBS trusts with a total unpaid principal balance of $1.6
billion.
66
Corporate Financing
•
Issued $300.0 million of 5.50% Senior Notes due 2023 (the “2023 Notes”).
• Redeemed $500.0 million of 3.625% Senior Notes due February 2021.
• Repurchased 343,130 shares of common stock with a weighted average repurchase price of $14.55 per share for
a total cost of $5.0 million.
Developments During 2020
Commercial and Residential Lending Segment
• Originated or acquired $1.9 billion of commercial loans during the year, including the following:
o £180.1 million ($238.1 million) first mortgage loan on a portfolio of 27 student housing properties
located in the United Kingdom, of which the Company funded $236.5 million.
o $220.0 million first mortgage and mezzanine loan on a 41-property extended stay portfolio located
across the U.S, of which the Company funded $205.0 million.
o $197.2 million first mortgage loan to refinance the existing leasehold debt and provide acquisition
financing for the fee interest in an 878,843 square-foot, six building office park located in California,
of which the Company funded $193.2 million.
o $150.0 million first mortgage and mezzanine loan to refinance 13 newly constructed self-storage
facilities located across the U.S., of which the Company funded $128.5 million.
o £89 million ($119.8 million) first mortgage loan for an office portfolio located in Ireland, which the
Company fully funded.
o $119.5 million first mortgage loan to refinance a 54-story oceanfront residential building located in
Florida, of which the Company funded $103.6 million.
o $109.8 million first mortgage and mezzanine loan for the construction of a 27-story waterfront
residential building located in Florida, of which the Company funded $2.2 million.
o $105.0 million first mortgage loan for the refinancing of a 347-unit Class A multifamily building
located in California, of which the Company funded $102.3 million.
• Funded $1.1 billion of previously originated commercial loan and preferred equity commitments.
• Received gross proceeds of $1.5 billion ($703.0 million, net of debt repayments) from maturities and principal
repayments on our commercial loans and single-borrower CMBS.
• Received gross proceeds of $271.3 million and $172.1 million ($84.5 million and $172.1 million, net of debt
repayments) from sales of senior interests in first mortgage loans and whole loan interests, respectively.
• Acquired $1.6 billion of residential loans, of which $176.6 million related to loans acquired through a
consolidated securitization unwind.
• Received proceeds of $1.8 billion, including retained RMBS of $282.4 million, from the securitization of $1.8
billion of residential loans.
• Received proceeds of $135.6 million from the sale of RMBS.
67
Infrastructure Lending Segment
• Originated or acquired $120.8 million of infrastructure loans and funded $164.9 million of pre-existing
infrastructure loan commitments.
• Received proceeds of $60.8 million from sales of infrastructure loans and $206.3 million from maturities and
principal repayments on our infrastructure loans and bonds.
Property Segment
• Refinanced our Woodstar I Portfolio by entering into mortgage loans with total borrowings of $217.1 million.
The loans carry ten-year terms and weighted average annual interest rates of LIBOR + 2.71%. A portion of the
net proceeds from the mortgage loans was used to repay $117.0 million of outstanding government sponsored
mortgage loans.
Investing and Servicing Segment
• Originated commercial conduit loans of $851.0 million. Separately, received proceeds of $975.6 million from
sales of previously originated commercial conduit loans.
• Acquired CMBS for a purchase price of $49.4 million and sold CMBS for total gross proceeds of $37.9 million,
of which $10.9 million related to non-controlling interests.
• Obtained 11 new special servicing assignments for CMBS trusts with a total unpaid principal balance of $9.3
billion.
• Sold a portion of our equity interest in a servicing and advisory business and recognized a gain of $10.3 million.
We further increased the value of our remaining investment to reflect the fair value as of that date based on the
sales price of the interest sold and recognized a gain of $17.6 million.
• Sold commercial real estate for gross proceeds of $24.1 million and recognized a gain of $7.4 million.
Corporate Financing
•
Issued $300.0 million of the 2023 Notes.
• Redeemed $500.0 million of 3.625% Senior Notes due February 2021.
• Repurchased 2,268,551 shares of common stock with a weighted average repurchase price of $14.89 per share
for a total cost of $33.8 million.
Subsequent Events
Refer to Note 25 to the Consolidated Financial Statements for disclosure regarding significant transactions that
occurred subsequent to December 31, 2020.
68
Results of Operations
The discussion below is based on GAAP and therefore reflects the elimination of certain key financial
statement line items related to the consolidation of securitization VIEs, particularly within revenues and other income, as
discussed in Note 2 to the Consolidated Financial Statements. For a discussion of our results of operations excluding the
impact of ASC 810 as it relates to the consolidation of securitization VIEs, refer to the section captioned “Non - GAAP
Financial Measures”.
The following table compares our summarized results of operations for the years ended December 31, 2020,
2019 and 2018 by business segment (amounts in thousands):
For the Year Ended December 31,
$ Change
2020
2019
2018
2020 vs. 2019
$ Change
2019 vs. 2018
Revenues:
Commercial and Residential Lending
Segment . . . . . . . . . . . . . . . . . . . . . . . . . $
749,660 $
80,987
255,745
183,027
—
(133,264)
1,136,155
693,032 $ 627,950 $
106,649
287,503
253,931
26
(144,722)
1,196,419
30,709
292,897
304,480
360
(147,116)
1,109,280
Infrastructure Lending Segment . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . .
Securitization VIE eliminations . . . . . . .
Costs and expenses:
Commercial and Residential Lending
Segment . . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure Lending Segment . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . .
Securitization VIE eliminations . . . . . . .
Other income (loss):
Commercial and Residential Lending
Segment . . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure Lending Segment . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . .
Securitization VIE eliminations . . . . . . .
Income (loss) before income taxes:
Commercial and Residential Lending
Segment . . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure Lending Segment . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . .
Securitization VIE eliminations . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . .
Net income attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Starwood
Property Trust, Inc. . . . . . . . . . . . . . . . . . $
273,861
54,008
243,857
138,677
253,997
8
964,408
261,150
85,764
272,911
165,094
245,049
(144)
1,029,824
53,126
(2,712)
(36,757)
34,224
33,158
133,492
214,531
528,925
24,267
(24,869)
78,574
(220,839)
220
386,278
(20,197)
20,806
(11,510)
(708)
205,420
24,523
145,041
383,572
452,688
9,375
13,884
294,257
(220,500)
463
550,167
(13,232)
56,628 $
(25,662)
(31,758)
(70,904)
(26)
11,458
(60,264)
65,082
75,940
(5,394)
(50,549)
(334)
2,394
87,139
12,711
(31,756)
(29,054)
(26,417)
8,948
152
(65,416)
34,525
52,378
(19,637)
3,471
(18,636)
91
52,192
32,320
8,798
(36,049)
(171,196)
8,635
(11,549)
(169,041)
12,189
(11,906)
(53,435)
110,806
33,952
(2,913)
88,693
226,625
33,386
292,548
161,623
263,685
(235)
977,632
8,617
396
52,727
94,614
(9,429)
147,954
294,879
409,942
(2,281)
53,076
237,471
(272,754)
1,073
426,527
(15,330)
76,237
14,892
(38,753)
(215,683)
(339)
(243)
(163,889)
(6,965)
42,746
11,656
(39,192)
56,786
52,254
(610)
123,640
2,098
(34,392)
(27,271)
(25,367)
(7,121)
(1,904)
331,689 $
509,664 $ 385,830 $
(177,975) $ 123,834
69
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Commercial and Residential Lending Segment
Revenues
For the year ended December 31, 2020, revenues of our Commercial and Residential Lending Segment
increased $56.6 million to $749.6 million, compared to $693.0 million for the year ended December 31, 2019. This
increase was primarily due to an increase in interest income from loans of $55.2 million and rental income from
foreclosed properties of $4.7 million, partially offset by a decrease in interest income from investment securities of $2.8
million. The increase in interest income from loans was principally due to (i) higher prepayment related income and
(ii) higher average balances of both commercial and residential loans, partially offset by (iii) lower average LIBOR rates
(partially mitigated by the LIBOR floors on most of our commercial loans). The decrease in interest income from
investment securities was primarily due to lower average balances, lower average LIBOR rates and lower prepayment
related income for our single-borrower CMBS, partially offset by higher average RMBS investment balances.
Costs and Expenses
For the year ended December 31, 2020, costs and expenses of our Commercial and Residential Lending
Segment increased $12.7 million to $273.8 million, compared to $261.1 million for the year ended December 31, 2019.
This increase was primarily due to a $44.6 million increase in credit loss provision and a $12.5 million increase in
general and administrative expenses primarily related to compensation and residential loan procurement, partially offset
by a $45.9 million decrease in interest expense associated with the various secured financing facilities used to fund a
portion of this segment’s investment portfolio. The increase in the credit loss provision was due to the recognition of
current expected credit losses (“CECL”) during the year ended December 31, 2020 in accordance with the new credit
loss accounting standard effective January 1, 2020 (see Notes 2 and 5 to the Consolidated Financial Statements). The
CECL provision during the year ended December 31, 2020 was magnified by the significant deterioration in
macroeconomic forecasts between the January 1 CECL effective date and year end due to the economic disruption
caused by the COVID-19 pandemic. The decrease in interest expense was primarily due to lower average LIBOR rates
partially offset by higher average borrowings outstanding.
Net Interest Income (amounts in thousands)
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
665,503
78,490
(176,230)
567,763
2019
Change
610,316 $ 55,187
(2,765)
45,888
469,453 $ 98,310
81,255
(222,118)
$
$
For the Year Ended December 31,
For the year ended December 31, 2020, net interest income of our Commercial and Residential Lending
Segment increased $98.3 million to $567.8 million, compared to $469.5 million for the year ended December 31, 2019.
This increase reflects the net increase in interest income and the decrease in interest expense, both as discussed in the
sections above.
During the years ended December 31, 2020 and 2019, the weighted average unlevered yields on the
Commercial and Residential Lending Segment’s loans and investment securities were as follows:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.6 %
6.9 %
6.7 %
7.3 %
6.9 %
7.3 %
The overall weighted average unlevered yield was lower as decreases in LIBOR more than offset higher levels
of prepayment related income.
For the Year Ended December 31,
2020
2019
70
During the years ended December 31, 2020 and 2019, the Commercial and Residential Lending Segment’s
weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred
financing fees, was 2.8% and 4.3%, respectively. The decrease in borrowing rates primarily reflects decreases in LIBOR.
Other Income
For the year ended December 31, 2020, other income of our Commercial and Residential Lending Segment
increased $32.3 million to $53.1 million, compared to $20.8 million for the year ended December 31, 2019. This
increase was primarily due to (i) a $66.4 million greater increase in fair value of residential loans and (ii) a $24.9 million
decrease in foreign currency loss, partially offset by (iii) a $38.3 million increased loss on derivatives, (iv) a $14.0
million greater decrease in fair value of investment securities and (v) a $5.6 million unfavorable change in gains (losses)
on sales of loans and securities. The greater increase in fair value of residential loans primarily reflects the simultaneous
purchase and securitization of $478.9 million of loans in the third quarter of 2020, pursuant to a trade confirmation that
we entered into in the second quarter of 2020. The increased loss on derivatives reflects a $26.4 million increased loss on
foreign currency hedges and an $11.9 million increased 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 investments. The increased foreign currency gain and increased loss on foreign
currency hedges reflect a weakening of the U.S. dollar against the pound sterling (“GBP”), Australian dollar (“AUD”)
and Euro, during the year ended December 31, 2020 versus a lesser overall weakening of the U.S. dollar during the year
ended December 31, 2019. The interest rate swaps are used primarily to fix our interest rate payments on certain variable
rate borrowings which fund fixed rate investments and to hedge our interest rate risk on residential loans held-for-sale.
The greater decrease in fair value of investment securities reflects the widening of credit spreads resulting from market
disruption and dislocation caused by the impacts of COVID-19 during 2020.
Infrastructure Lending Segment
Revenues
For the year ended December 31, 2020, revenues of our Infrastructure Lending Segment decreased $25.6
million to $81.0 million, compared to $106.6 million for the year ended December 31, 2019. This decrease was primarily
due to decreases in interest income from loans of $21.7 million and investment securities of $3.7 million. The decrease
in interest income from loans was primarily due to a decrease in average LIBOR rates and lower average loan balances
outstanding as a result of sales and repayments, partially offset by an increase in average spreads on our infrastructure
loans. The decrease in interest income from investment securities was primarily due to lower prepayment related income
and average investment balances outstanding.
Costs and Expenses
For the year ended December 31, 2020, costs and expenses of our Infrastructure Lending Segment decreased
$31.8 million to $54.0 million, compared to $85.8 million for the year ended December 31, 2019. This decrease was
primarily due to a $21.9 million decrease in interest expense associated with the various secured financing facilities used
to fund a portion of this segment’s investment portfolio and an $8.6 million decrease in credit loss provision. The
decrease in interest expense was primarily due to lower average LIBOR rates and lower average borrowings as a result
of loan sales and repayments. The decrease in the credit loss provision reflects a $4.1 million reversal in 2020 compared
to a $4.5 million provision during 2019. The reversal in 2020 was primarily due to shorter remaining maturities and
lower outstanding held-for-investment loan balances and future funding commitments since the establishment of the
initial CECL credit loss allowance effective January 1, 2020.
71
Net Interest Income (amounts in thousands)
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
77,851 $
2,637
(40,913)
39,575 $
2019
Change
99,580 $ (21,729)
(3,681)
6,318
(62,836)
21,923
43,062 $ (3,487)
For the Year Ended December 31,
For the year ended December 31, 2020, net interest income of our Infrastructure Lending Segment decreased
$3.5 million to $39.6 million, compared to $43.1 million for the year ended December 31, 2019. The decrease reflects
the decreases in interest income, partially offset by the decrease in interest expense, both as discussed in the sections
above.
During the years ended December 31, 2020 and 2019, the weighted average unlevered yields on the
Infrastructure Lending Segment’s investments were as follows:
Loans and investment securities held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.2 %
3.5 %
6.4 %
5.1 %
During the years ended December 31, 2020 and 2019, the Infrastructure Lending Segment’s weighted average
secured borrowing rate, inclusive of the amortization of deferred financing fees, was 3.4% and 4.7%, respectively.
For the Year Ended December 31,
2020
2019
Other Loss
For the year ended December 31, 2020, other loss of our Infrastructure Lending Segment decreased $8.8
million to $2.7 million, compared to $11.5 million for the year ended December 31, 2019. The decrease in other loss
primarily reflects a decreased loss on extinguishment of debt resulting from the write-off of deferred financing fees
relating to partial debt prepayments from proceeds of loan repayments and sales.
Property Segment
Change in Results by Portfolio (amounts in thousands)
Costs and Gain (loss) on derivative
$ Change from prior year
Revenues expenses
financial instruments Other income (loss)
— $
100 $
Income (loss) before
income taxes
Master Lease Portfolio . . . . . . . . . . . . . . $
(8,015)
Medical Office Portfolio . . . . . . . . . . . .
7,332
Woodstar I Portfolio . . . . . . . . . . . . . . . .
Woodstar II Portfolio . . . . . . . . . . . . . . .
923
Ireland Portfolio . . . . . . . . . . . . . . . . . . . (34,738) (28,563)
Investment in unconsolidated entities . . .
Other/Corporate . . . . . . . . . . . . . . . . . . .
10 $
(29)
1,562
1,437
(72)
(786)
—
—
127 $
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ (31,758) $ (29,054) $
(18,207)
(295)
—
(14,606)
—
—
(33,108) $
4,745
(1,703)
—
(120,449)
114,362
4
(2,941) $
(17)
(5,476)
(7,768)
514
(141,230)
114,434
790
(38,753)
See Notes 3 and 7 to the Consolidated Financial Statements for a description of the above-referenced Property
Segment portfolios. As discussed in Note 3, the Ireland Portfolio, which was comprised of 11 office properties and one
multifamily property all located in Dublin, Ireland, was sold in December 2019.
Revenues
For the year ended December 31, 2020, revenues of our Property Segment decreased $31.8 million to $255.7
million, compared to $287.5 million for the year ended December 31, 2019. The decrease in revenues was primarily due
to the sale of the Ireland Portfolio in December 2019, partially offset by increased rental income in the Woodstar
Portfolios due to rental rate increases effective May 2019.
72
Costs and Expenses
For the year ended December 31, 2020, costs and expenses of our Property Segment decreased $29.0 million to
$243.9 million, compared to $272.9 million for the year ended December 31, 2019. The decrease in costs and expenses
primarily reflects the sale of the Ireland Portfolio in December 2019.
Other Loss
For the year ended December 31, 2020, other loss of our Property Segment increased $36.1 million to $36.8
million, compared to $0.7 million for the year ended December 31, 2019. The increase in other loss was primarily due to
a $33.1 million increased loss on derivatives reflecting (i) an $18.5 million increased loss on interest rate swaps which
primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio and (ii) the non-
recurrence of a $14.6 million gain in 2019 on foreign exchange contracts which economically hedged our Euro currency
exposure to the Ireland Portfolio. Other non-recurring items included a $119.7 million gain in 2019 on the sale of the
Ireland Portfolio, substantially offset by a $114.4 million loss in 2019 from our equity investee that owns four regional
shopping malls (the “Retail Fund”). Our investment in the Retail Fund was written off as of December 31, 2019 due to
continued declines in the estimated fair values of its properties.
Investing and Servicing Segment
Revenues
For the year ended December 31, 2020, revenues of our Investing and Servicing Segment decreased $70.9
million to $183.0 million, compared to $253.9 million for the year ended December 31, 2019. The decrease in revenues
was primarily due to decreases of (i) $29.4 million in interest income from CMBS and conduit loans, which reflects a
$16.1 million decrease in interest recoveries on CMBS and lower average balances of conduit loans held-for-sale,
(ii) $28.2 million in servicing fees and (iii) $13.2 million in rental income from our REIS Equity Portfolio primarily due
to fewer properties held.
Costs and Expenses
For the year ended December 31, 2020, costs and expenses of our Investing and Servicing Segment decreased
$26.4 million to $138.7 million, compared to $165.1 million for the year ended December 31, 2019. The decrease in
costs and expenses was primarily due to decreases of (i) $11.0 million in costs of rental operations, depreciation and
amortization due to fewer properties held, (ii) $9.3 million in interest expense on borrowings related to properties held
and conduit loans and (iii) $7.1 million in general and administrative expenses reflecting lower compensation costs.
Other Income
For the year ended December 31, 2020, other income of our Investing and Servicing Segment decreased $171.2
million to $34.2 million, compared to $205.4 million for the year ended December 31, 2019. The decrease in other
income was primarily due to (i) a $140.6 million unfavorable change in fair value of CMBS investments primarily due to
widening credit spreads resulting from market disruption and dislocation caused by the impacts of COVID-19 in 2020,
(ii) a $52.7 million decreased gain on sales of operating properties, (iii) a $13.9 million increased loss on derivatives
which primarily hedge our interest rate risk on conduit loans and (iv) a $4.9 million lesser increase in fair value of
conduit loans, all partially offset by (v) realized and unrealized gains totaling $27.9 million resulting from the sale in
April 2020 of a portion of our unconsolidated equity interest in a servicing and advisory business, as further described in
Note 8 to the Consolidated Financial Statements, and (vi) a $12.9 million favorable change in fair value of servicing
rights.
Corporate and Other Items
Corporate Costs and Expenses
For the year ended December 31, 2020, corporate expenses increased $8.9 million to $254.0 million, compared
to $245.1 million for the year ended December 31, 2019. The increase was primarily due to an $8.0 million increase in
management fees.
73
Corporate Other Income
For the year ended December 31, 2020, corporate other income increased $8.6 million to $33.1 million,
compared to $24.5 million for the year ended December 31, 2019. The increase in corporate other income was primarily
due to a $7.6 million increase in gains on interest rate swaps which hedge a portion of our unsecured senior notes used to
repay variable-rate secured financing and a $1.0 million decreased loss on extinguishment of debt.
Securitization VIE Eliminations
Securitization VIE eliminations primarily reclassify interest income and servicing fee revenues to other income
(loss) for the CMBS and RMBS VIEs that we consolidate as primary beneficiary. Such eliminations have no overall
effect on net income (loss) attributable to Starwood Property Trust. The reclassified revenues, along with applicable
changes in fair value of investment securities and servicing rights, comprise the other income (loss) caption “Change in
net assets related to consolidated VIEs,” which represents our beneficial interest in those consolidated VIEs. The
magnitude of the securitization VIE eliminations is merely a function of the number of CMBS and RMBS trusts
consolidated in any given period, and as such, is not a meaningful indicator of operating results. The eliminations
primarily relate to CMBS trusts for which the Investing and Servicing Segment is deemed the primary beneficiary and,
to a much lesser extent, some CMBS and RMBS trusts for which the Commercial and Residential Lending Segment is
deemed the primary beneficiary.
Income Tax Provision
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan
securitization businesses which are housed in taxable REIT subsidiaries (“TRSs”). For the year ended December 31,
2020, our income tax provision increased $7.0 million to $20.2 million, compared to $13.2 million for the year ended
December 31, 2019. The increase primarily reflects an overall increase in the taxable income of our TRSs.
Net Income Attributable to Non-controlling Interests
For the year ended December 31, 2020, net income attributable to non-controlling interests increased $7.1
million to $34.4 million, compared to $27.3 million for the year ended December 31, 2019. The increase was primarily
due to non-controlling interests in earnings of a consolidated CMBS joint venture in which we hold a 51% interest.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Commercial and Residential Lending Segment
Revenues
For the year ended December 31, 2019, revenues of our Commercial and Residential Lending Segment
increased $65.1 million to $693.0 million, compared to $627.9 million for the year ended December 31, 2018. This
increase was primarily due to increases in interest income from loans of $33.8 million and investment securities of $31.2
million. The increased interest income from loans was principally due to (i) higher average LIBOR rates, (ii) higher
average balances of both commercial and residential loans and (iii) higher levels of prepayment related income, partially
offset by (iv) the compression of interest rate spreads in credit markets and (v) the recognition in the 2018 period of a
$15.1 million profit participation in a mortgage loan that was repaid in 2016. The increase in interest income from
investment securities was primarily due to higher average investment balances.
Costs and Expenses
For the year ended December 31, 2019, costs and expenses of our Commercial and Residential Lending
Segment increased $34.5 million to $261.1 million, compared to $226.6 million for the year ended December 31, 2018.
This increase was primarily due to a $61.3 million increase in interest expense associated with the various secured
financing facilities used to fund a portion of our investment portfolio, partially offset by a $32.2 million decrease in loan
loss provision relating to impairment charges on certain commercial loans in the 2018 second quarter.
74
Net Interest Income (amounts in thousands)
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
610,316
81,255
(222,118)
469,453
2018
Change
576,564 $ 33,752
31,192
(61,349)
3,595
50,063
(160,769)
465,858 $
$
$
For the Year Ended December 31,
For the year ended December 31, 2019, net interest income of our Commercial and Residential Lending
Segment increased $3.6 million to $469.5 million, compared to $465.9 million for the year ended December 31, 2018.
This increase reflects the net increase in interest income explained in the Revenues discussion above, which was partially
offset by the increase in interest expense on our secured financing facilities.
During the years ended December 31, 2019 and 2018, the weighted average unlevered yields on the
Commercial and Residential Lending Segment’s loans and investment securities were as follows:
For the Year Ended December 31,
2019
2018
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.3 %
6.9 %
7.3 %
7.8 %
7.0 %
7.7 %
The overall weighted average unlevered yield was lower as the compression of interest rate spreads in credit
markets and the recognition in the 2018 period of the $15.1 million loan profit participation more than offset the effects
of higher average LIBOR rates and higher levels of prepayment related income.
During both the years ended December 31, 2019 and 2018, the Commercial and Residential Lending Segment’s
weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred
financing fees, was 4.3%.
Other Income
For the year ended December 31, 2019, other income of our Commercial and Residential Lending Segment
increased $12.2 million to $20.8 million, compared to $8.6 million for the year ended December 31, 2018. The increase
was primarily due to (i) a $19.0 million favorable change in fair value of residential loans and investment securities,
(ii) a $25.2 million favorable change in foreign currency gain (loss) and (iii) a $5.6 million increase in earnings from
unconsolidated entities, all partially offset by (iv) a $38.0 million unfavorable change in gain (loss) on derivatives. The
unfavorable change in derivatives reflects a $22.7 million unfavorable change in foreign currency hedges and a $15.3
million unfavorable change in interest rate swaps. The foreign currency hedges are used to fix the U.S. dollar amounts
of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans
and investments. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate
borrowings which fund fixed rate investments. The unfavorable change in foreign currency hedges and the favorable
change in foreign currency gain (loss) reflect an overall weakening of the U.S. dollar against the GBP in the year ended
December 31, 2019 versus a strengthening of the U.S. dollar in the year ended December 31, 2018.
75
Infrastructure Lending Segment
The Infrastructure Lending Segment was acquired on September 19, 2018. Therefore, its results for the year
ended December 31, 2018 reflect only the period from the acquisition date through December 31, 2018. Accordingly, the
following discussion attempts no comparison to the prior year results.
Revenues
For the years ended December 31, 2019 and 2018, revenues of our Infrastructure Lending Segment were $106.6
million and $30.7 million, respectively, which includes interest income of $99.6 million and $29.0 million, respectively,
from loans and $6.3 million and $1.1 million, respectively, from investment securities.
Costs and Expenses
For the years ended December 31, 2019 and 2018, costs and expenses of our Infrastructure Lending Segment
were $85.8 million and $33.4 million, respectively, which includes $62.8 million and $20.9 million, respectively, of
interest expense on secured debt facilities used to finance this segment’s investment portfolio and $18.3 million and $5.6
million, respectively, of general and administrative expenses. Also included in the year ended December 31, 2018 were
$6.8 million of acquisition costs.
Net Interest Income (amounts in thousands)
For the Year Ended
December 31,
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
99,580
6,318
(62,836)
43,062 $
2018
Change
28,995 $ 70,585
5,223
(41,887)
9,141 $ 33,921
1,095
(20,949)
Interest income from infrastructure loans and investment securities and interest expense on the secured
financing facilities reflect primarily variable LIBOR based rates.
During the years ended December 31, 2019 and 2018, the weighted average unlevered yields on the
Infrastructure Lending Segment’s investments were as follows:
Loans and investment securities held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.4 %
5.1 %
5.9 %
3.6 %
During both the years ended December 31, 2019 and 2018, the Infrastructure Lending Segment’s weighted
average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 4.7%.
For the Year Ended December 31,
2019
2018
Other Income (Loss)
Other income (loss) of our Infrastructure Lending Segment was a loss of $11.5 million and income of $0.4
million for the years ended December 31, 2019 and 2018, respectively. Other loss for the year ended December 31,
2019 primarily reflects an $11.4 million loss on extinguishment of debt resulting from the write-off of deferred financing
fees relating to partial debt prepayments from proceeds of loan repayments and sales. Other income for the year ended
December 31, 2018 consisted of a $1.8 million gain on foreign currency hedges, partially offset by $1.4 million in
foreign currency losses on principally GBP and Euro-denominated loans.
76
Property Segment
Change in Results by Portfolio (amounts in thousands)
Costs and Gain (loss) on derivative
$ Change from prior year
Revenues expenses
financial instruments Other income (loss)
— $
Master Lease Portfolio . . . . . . . . . . . . . . $ (19,309) $ (14,156) $
Medical Office Portfolio . . . . . . . . . . . .
Ireland Portfolio . . . . . . . . . . . . . . . . . . .
Woodstar I Portfolio . . . . . . . . . . . . . . . .
Woodstar II Portfolio . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . .
Other/Corporate . . . . . . . . . . . . . . . . . . .
(2,598)
(1,910)
2,004
(2,516)
72
(533)
(1,964)
(1,935)
4,265
13,549
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,394) $ (19,637) $
Revenues
Income (loss) before
income taxes
(27,697) $
(5,235)
121,580
—
(18)
(118,020)
(5)
(29,395) $
(32,850)
(28,816)
119,133
2,261
16,047
(118,092)
3,125
(39,192)
(24,215)
(2,422)
—
—
—
2,597
(24,040) $
For the year ended December 31, 2019, revenues of our Property Segment decreased $5.4 million to $287.5
million, compared to $292.9 million for the year ended December 31, 2018. The decrease in revenues was primarily due
to a decrease in rental income from the Master Lease Portfolio due to (i) the sale of seven properties within the Master
Lease Portfolio during 2018 and (ii) no longer recording as revenues and offsetting expenses property taxes paid directly
by lessees, in accordance with the new lease accounting standard effective January 1, 2019 (see Note 2 to the
Consolidated Financial Statements) in both the Master Lease and Medical Office Portfolios, partially offset by (iii) the
full period inclusion of rental income from the Woodstar II Portfolio, which was acquired over a period between
December 2017 and September 2018, and (iv) rental rate increases in both Woodstar Portfolios.
Costs and Expenses
For the year ended December 31, 2019, costs and expenses of our Property Segment decreased $19.6 million to
$272.9 million, compared to $292.5 million for the year ended December 31, 2018. The decrease in costs and expenses
primarily reflects (i) the sale of seven properties within the Master Lease portfolio during 2018, (ii) no longer recording
as revenues and offsetting expenses property taxes paid directly by lessees, as discussed above, and (iii) decreased
expenses in the Woodstar II Portfolio primarily due to in-place lease intangibles becoming fully amortized, partially
offset by (iv) the full period inclusion of the properties acquired in the Woodstar II Portfolio since January 2018.
Other Income (Loss)
For the year ended December 31, 2019, other income (loss) of our Property Segment decreased $53.4 million to
a loss of $0.7 million, compared to income of $52.7 million for the year ended December 31, 2018. The decrease in
other income was primarily due to (i) a $118.0 million unfavorable change in earnings (loss) from an unconsolidated
entity and (ii) a $24.0 million unfavorable change in gain (loss) on derivatives, both partially offset by (iii) a $91.2
million increase in gain on sale of properties. The $118.0 million unfavorable change in earnings (loss) from an
unconsolidated entity principally reflects the recognition of decreases in fair value of properties held by the Retail Fund,
including an impairment we recorded for our remaining investment as of December 31, 2019 (see Note 8 to the
Consolidated Financial Statements). The $24.0 million unfavorable change in gain (loss) on derivatives consists of (i) a
$21.5 million unfavorable change in interest rate swaps which primarily hedge the variable interest rate risk on
borrowings secured by our Medical Office Portfolio and (ii) a $2.5 million unfavorable change in foreign exchange
contracts which economically hedged our Euro currency exposure with respect to the Ireland Portfolio. The $91.2
million increased gain on sale of properties is due to a $119.7 million gain on sale of the Ireland Portfolio in
December 2019 compared to gains of $28.5 million on the sales of seven properties in the Master Lease Portfolio during
the year ended December 31, 2018. Refer to Note 3 to the Consolidated Financial Statements for further detail.
77
Investing and Servicing Segment
Revenues
For the year ended December 31, 2019, revenues of our Investing and Servicing Segment decreased $50.6
million to $253.9 million, compared to $304.5 million for the year ended December 31, 2018. The decrease in revenues
in the year ended December 31, 2019 was primarily due to decreases of (i) $33.9 million in servicing fees, (ii) $9.4
million in CMBS interest income principally due to lower interest recoveries and (iii) $6.4 million in rental income from
our REIS Equity Portfolio due to fewer properties held.
Costs and Expenses
For the year ended December 31, 2019, costs and expenses of our Investing and Servicing Segment increased
$3.5 million to $165.1 million, compared to $161.6 million for the year ended December 31, 2018. The increase in costs
and expenses was primarily due to a $6.2 million increase in interest expense principally related to the financing of our
CMBS portfolio, partially offset by decreases of $4.8 million related to our REIS Equity Portfolio due to fewer
properties held.
Other Income
For the year ended December 31, 2019, other income of our Investing and Servicing Segment increased $110.8
million to $205.4 million, from $94.6 million for the year ended December 31, 2018. The increase in other income was
primarily due to (i) a $56.0 million greater increase in the fair value of CMBS investments, (ii) a $34.1 million increase
in gains on sales of operating properties, (iii) a $13.8 million greater increase in the fair value of our conduit loans and
(iv) a $12.9 million lesser decrease in fair value of servicing rights primarily reflecting the expected reduction in
amortization of this deteriorating asset net of increases in fair value due to the attainment of new servicing contracts, all
partially offset by (v) a $7.1 million increased loss on derivatives which primarily hedge our interest rate risk on conduit
loans.
Corporate and Other Items
Corporate Costs and Expenses
For the year ended December 31, 2019, corporate expenses decreased $18.6 million to $245.1 million,
compared to $263.7 million for the year ended December 31, 2018. The decrease was primarily due to a $10.8 million
decrease in interest expense principally on lower average outstanding balances of our unsecured senior notes and a $9.7
million decrease in management fees.
Corporate Other Income (Loss)
For the year ended December 31, 2019, corporate other income (loss) improved $33.9 million to income of
$24.5 million, compared to a loss of $9.4 million for the year ended December 31, 2018. The increase in corporate other
income was primarily due to a $33.4 million favorable change in gain (loss) on interest rate swaps used to hedge a
portion of our unsecured senior notes used to repay variable rate secured financing.
Securitization VIE Eliminations
Refer to the preceding comparison of the year ended December 31, 2020 to the year ended December 31, 2019
for a discussion of the nature of securitization VIE eliminations.
Income Tax Provision
Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan
securitization businesses which are housed in TRSs. For the year ended December 31, 2019, our income tax provision
decreased $2.1 million to $13.2 million, compared to $15.3 million for the year ended December 31, 2018. The decrease
primarily reflects a decrease in the taxable income of our TRSs.
78
Net Income Attributable to Non-controlling Interests
For the year ended December 31, 2019, net income attributable to non-controlling interests increased $1.9
million to $27.3 million, compared to $25.4 million for the year ended December 31, 2018. The increase was primarily
due to increased non-controlling interests in our Woodstar II Portfolio, which consists of properties acquired in and after
December 2017.
Non - GAAP Financial Measures
Distributable Earnings is a non - GAAP financial measure. We calculate Distributable Earnings as GAAP net
income (loss) excluding the following:
(i)
non - cash equity compensation expense;
(ii)
incentive fees due under our management agreement;
(iii)
depreciation and amortization of real estate and associated intangibles;
(iv)
acquisition costs associated with successful acquisitions;
(v)
any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period,
regardless of whether such items are included in other comprehensive income or loss, or in net income
(loss); and
(vi)
any deductions for distributions payable with respect to equity securities of subsidiaries issued in
exchange for properties or interests therein.
During the year ended December 31, 2020, we recorded a $42.1 million increase in the current expected credit
loss, or CECL, reserve, which has been excluded from Distributable Earnings consistent with other unrealized gains
(losses) pursuant to our existing policy for reporting Distributable Earnings. We expect to only recognize such potential
credit losses in Distributable Earnings if and when such amounts are deemed nonrecoverable upon a realization event.
This is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold, but non-
recoverability may also be determined if, in our determination, it is nearly certain that all amounts due will not be
collected. The realized loss amount reflected in Distributable Earnings will equal the difference between the cash
received, or expected to be received, and the book value of the asset, and is reflective of our economic experience as it
relates to the ultimate realization of the loan.
We believe that Distributable Earnings provides meaningful information to consider in addition to our net
income (loss) and cash flow from operating activities determined in accordance with GAAP. We believe Distributable
Earnings is a useful financial metric for existing and potential future holders of our common stock as historically, over
time, Distributable Earnings has been a strong indicator of our dividends per share. As a REIT, we generally must
distribute annually at least 90% of our net taxable income, subject to certain adjustments, and therefore we believe our
dividends are one of the principal reasons stockholders may invest in our common stock. Further, Distributable Earnings
helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe
are not necessarily indicative of our current loan portfolio and operations, and is a performance metric we consider when
declaring our dividends. We also use Distributable Earnings (previously defined as “Core Earnings”) to compute the
incentive fee due under our management agreement.
Distributable Earnings does not represent net income (loss) or cash generated from operating activities and
should not be considered as an alternative to GAAP net income (loss), or an indication of our GAAP cash flows from
operations, a measure of our liquidity, taxable income, or an indication of funds available for our cash needs. In addition,
our methodology for calculating Distributable Earnings may differ from the methodologies employed by other
companies to calculate the same or similar supplemental performance measures, and accordingly, our reported
Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.
79
The weighted average diluted share count applied to Distributable Earnings for purposes of determining
Distributable Earnings per share (“EPS”) is computed using the GAAP diluted share count, adjusted for the following:
(i)
(ii)
(iii)
Unvested stock awards – Currently, unvested stock awards are excluded from the denominator of
GAAP EPS. The related compensation expense is also excluded from Distributable Earnings. In order
to effectuate dilution from these awards in the Distributable Earnings computation, we adjust the
GAAP diluted share count to include these shares.
Convertible Notes – Conversion of our Convertible Notes is an event that is contingent upon numerous
factors, none of which are in our control, and is an event that may or may not occur. Consistent with
the treatment of other unrealized adjustments to Distributable Earnings, we adjust the GAAP diluted
share count to exclude the potential shares issuable upon conversion until a conversion occurs.
Subsidiary equity – The intent of a February 2018 amendment to our management agreement (the
“Amendment”) is to treat subsidiary equity in the same manner as if parent equity had been issued.
The Class A Units issued in connection with the acquisition of assets in our Woodstar II Portfolio are
currently excluded from our GAAP diluted share count, with the subsidiary equity represented as non-
controlling interests in consolidated subsidiaries on our GAAP balance sheet. Consistent with the
Amendment, we adjust GAAP diluted share count to include these subsidiary units.
80
The following table presents our diluted weighted average shares used in our GAAP EPS calculation reconciled
to our diluted weighted average shares used in our Distributable EPS calculation (amounts in thousands):
Diluted weighted average shares - GAAP EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282,483
Add: Unvested stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,801
Add: Woodstar II Class A Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,656
Less: Convertible Notes dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Diluted weighted average shares - Distributable EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
For the Year Ended December 31,
2019
289,712
2,271
11,365
(9,805)
2018
288,484
2,285
8,971
(22,659)
277,081
295,940 293,543
The definition of Distributable 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
Distributable Earnings to be calculated in a manner consistent with its definition and objective. No adjustments to the
definition of Distributable Earnings became effective during the year ended December 31, 2020.
As a reminder, in 2015, we adjusted the calculation of Distributable Earnings related to the equity component of
our Convertible Notes. We previously amortized the equity component of these instruments through interest expense for
Distributable Earnings purposes, consistent with our GAAP treatment. However, for Distributable Earnings purposes,
the amount is not considered realized until the earlier of (a) the entire issuance of the notes has been extinguished; or
(b) the equity portion has been fully amortized via repurchases of the notes
In January 2019, our 4.00% Convertible Senior Notes due 2019 (the “2019 Convertible Notes”) were fully
repaid in shares of common stock and cash. The equity portion of the 2019 Convertible Notes had been fully amortized.
In March 2018, our 4.55% Convertible Senior Notes due 2018 (the “2018 Convertible Notes”) matured and were fully
repaid in cash. The equity portion of the 2018 Convertible Notes had not been fully amortized. As a result, we reflected
$10.0 million as a positive adjustment to Distributable Earnings, representing the $28.1 million equity balance
recognized upon issuance of the 2018 Convertible Notes, net of $18.1 million in adjustments related to cumulative
repurchases through the maturity date.
The following table summarizes our quarterly Distributable Earnings per weighted average diluted share for the
years ended December 31, 2020, 2019 and 2018:
Distributable Earnings For the Three-
Month Periods Ended
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.55
0.28
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.58
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31 June 30 September 30 December 31
0.50
$
0.47
0.54
0.50 $
0.52
0.53
$ 0.43
0.52
0.54
Distributable Earnings per weighted average diluted share for the year ended December 31, 2019 does not equal
the sum of the individual quarters due to rounding and other computational factors.
81
The following table presents our summarized results of operations and reconciliation to Distributable Earnings
for the year ended December 31, 2020, by business segment (amounts in thousands):
Revenues . . . . . . . . . . . . . . . . . . . . .
Commercial
and
Residential
Lending
Segment
749,660 $
$
Infrastructure
Lending
Segment
Property
Segment
255,745 $
80,987 $
Investing
and Servicing
Segment
Corporate
Total
183,027 $
— $ 1,269,419
Costs and expenses . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . .
(273,861)
53,126
(54,008)
(2,712)
(243,857)
(36,757)
(138,677)
34,224
(253,997)
33,158
(964,400)
81,039
Income (loss) before income taxes .
Income tax (provision) benefit . . . . .
Income attributable to
non-controlling interests . . . . . . . .
Net income (loss) attributable to
528,925
(21,091)
24,267
(117)
(24,869)
—
78,574
1,011
(220,839)
—
386,058
(20,197)
(14)
—
(20,394)
(13,764)
—
(34,172)
Starwood Property Trust, Inc. . .
507,820
24,150
(45,263)
65,821
(220,839)
331,689
Add / (Deduct):
Non-controlling interests
attributable to Woodstar II
Class A Units . . . . . . . . . . . . . . . . .
Non-cash equity compensation
expense . . . . . . . . . . . . . . . . . . . . .
Management incentive fee . . . . . . . .
Acquisition and investment
pursuit costs . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . .
Credit loss provision (reversal),
net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income adjustment
for securities . . . . . . . . . . . . . . . . .
Extinguishment of debt, net . . . . . . .
Income tax provision (benefit)
associated with fair value
adjustments . . . . . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . .
Reversal of GAAP unrealized
(gains) / losses on:
Loans . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . .
(Earnings) loss from
unconsolidated entities . . . . . . .
Recognition of Distributable
realized gains / (losses) on:
Loans . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . .
Earnings (loss) from
unconsolidated entities . . . . . .
Sales of properties . . . . . . . . . . .
Distributable Earnings (Loss) .
Distributable Earnings
(Loss) per Weighted
Average Diluted Share . . . . .
—
—
20,394
—
—
20,394
4,454
—
123
1,467
1,120
—
219
—
4,594
—
20,854
30,773
—
294
(355)
76,544
(72)
14,501
46,215
(4,103)
(864)
—
6,495
14
—
—
—
—
—
—
—
—
15,101
—
—
(2,063)
(405)
942
—
631
6,090
(476)
31,241
30,773
(304)
92,806
42,112
14,237
(986)
—
—
—
—
(986)
(76,897)
15,108
56,862
(42,205)
—
—
1,365
(207)
—
—
30,113
14
(56,227)
51,403
19,768
3
—
—
(19,564)
—
(133,124)
66,511
88,544
(42,395)
(8,779)
767
—
(30,845)
—
(38,857)
48,203
398
(7,711)
(4,810)
5,686
—
(62)
—
118
(133)
(382)
—
—
—
(473)
(14)
—
—
55,287
(18,100)
(13,418)
(3)
18,247
(5,789)
—
—
—
—
—
—
103,428
(17,702)
(21,484)
(4,960)
23,551
(5,789)
$
551,579 $
22,927 $
79,116 $
120,808 $ (189,131) $
585,299
$
1.86 $
0.08 $
0.27 $
0.41 $
(0.64) $
1.98
82
The following table presents our summarized results of operations and reconciliation to Distributable Earnings
for the year ended December 31, 2019, by business segment (amounts in thousands):
Commercial
and
Residential Infrastructure
Lending
Segment
Lending
Segment
Property
Segment
Investing
and Servicing
Segment
Corporate
Total
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 693,032 $
Costs and expenses . . . . . . . . . . . . . . . . . . . . (261,150)
Other income (loss) . . . . . . . . . . . . . . . . . . . .
20,806
452,688
Income (loss) before income taxes . . . . . . . .
Income tax (provision) benefit . . . . . . . . . . . .
(4,818)
Income attributable to non-controlling
253,931 $
106,649 $ 287,503 $
(85,764) (272,911) (165,094)
205,420
(11,510)
294,257
9,375
(8,110)
89
13,884
(393)
(708)
26 $
(245,049)
24,523
(220,500)
—
1,341,141
(1,029,968)
238,531
549,704
(13,232)
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(392)
—
(21,630)
(4,786)
—
(26,808)
Net income (loss) attributable to
Starwood Property Trust, Inc. . . . . . . . . .
447,478
9,464
(8,139)
281,361
(220,500)
509,664
Add / (Deduct):
Non-controlling interests attributable to
Woodstar II Class A Units . . . . . . . . . . . . . .
Non-cash equity compensation expense . . . .
Management incentive fee . . . . . . . . . . . . . . .
Acquisition and investment pursuit costs . . .
Depreciation and amortization . . . . . . . . . . . .
Credit loss provision, net . . . . . . . . . . . . . . . .
Interest income adjustment for securities. . . .
Extinguishment of debt, net . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . .
Reversal of GAAP unrealized (gains) /
losses on:
—
3,918
—
(882)
1,091
2,616
(617)
—
—
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . .
(Earnings) loss from unconsolidated
(10,462)
1,084
20,680
(17,342)
—
2,683
—
2
83
4,510
—
—
—
—
—
3,353
(205)
21,630
312
—
(355)
93,864
—
—
—
(1,798)
—
6,582
—
(780)
18,156
—
15,933
—
(1,067)
—
22,697
20,165
(356)
—
—
—
(1,950)
623
—
—
6,268
(37)
(61,139)
(89,206)
7,536
2
—
—
(26,396)
—
21,630
36,192
20,165
(2,371)
113,194
7,126
15,316
(1,950)
(2,242)
(71,601)
(88,122)
11,441
(17,582)
entities . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,649)
—
114,362
(4,166)
—
99,547
Recognition of Distributable realized
gains / (losses) on:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . .
Earnings (loss) from unconsolidated
entities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales of properties . . . . . . . . . . . . . . . . . .
Distributable Earnings (Loss) . . . . . . . . $ 450,886 $
Distributable Earnings (Loss) per
9,028
970
(5,500)
622
8,851
—
(984)
—
(1,186)
(1,081)
—
—
17,238
37
63,908
14,608
(10,153)
7
—
—
16,639 $
(139,462)
(74,878)
29,042 $
15,812
(19,359)
238,035 $
—
—
—
—
—
—
(205,717) $
71,952
15,578
399
(415)
(114,799)
(94,237)
528,885
Weighted Average Diluted Share . . . . $
1.54 $
0.05 $
0.10 $
0.81 $
(0.70) $
1.80
83
The following table presents our summarized results of operations and reconciliation to Distributable Earnings
for the year ended December 31, 2018, by business segment (amounts in thousands):
Commercial
and
Residential
Lending
Segment
Infrastructure
Lending
Segment
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 627,950
30,709 $
Investing
and Servicing
Segment
Property
Segment
292,897 $
Corporate
Total
304,480 $
360 $ 1,256,396
(226,625)
8,617
409,942
(2,801)
(33,386)
396
(2,281)
(292)
(292,548)
52,727
53,076
(7,549)
(161,623)
94,614
237,471
(4,688)
(263,685)
(9,429)
(272,754)
(977,867)
146,925
425,454
(15,330)
—
(1,451)
—
(17,623)
(5,220)
—
(24,294)
405,690
(2,573)
27,904
227,563
(272,754)
385,830
Costs and expenses . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . .
Income attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to
Starwood Property Trust, Inc. . . . . . . . . .
Add / (Deduct):
Non-controlling interests attributable to
Woodstar II Class A Units . . . . . . . . . . . . . .
Non-cash equity compensation expense . . . .
Management incentive fee . . . . . . . . . . . . . . .
Acquisition and investment pursuit costs . . .
Depreciation and amortization . . . . . . . . . . . .
Credit loss provision, net . . . . . . . . . . . . . . . .
Interest income adjustment for securities. . . .
Extinguishment of debt, net . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . .
Reversal of GAAP unrealized (gains) /
losses on:
—
2,857
—
1,391
76
34,821
(736)
—
—
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . .
6,851
(763)
(18,439)
7,816
(5,063)
Recognition of Distributable realized
gains / (losses) on:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(616)
Securities . . . . . . . . . . . . . . . . . . . . . . . . .
3,528
Derivatives . . . . . . . . . . . . . . . . . . . . . . . .
(7,258)
Foreign currency . . . . . . . . . . . . . . . . . . .
9,913
Earnings from unconsolidated entities . . .
5,178
Sales of properties . . . . . . . . . . . . . . . . . .
—
Distributable Earnings (Loss) . . . . . . . . $ 445,246
Distributable Earnings (Loss) per
—
477
—
3,827
—
—
—
—
—
—
—
(1,821)
1,425
—
17,623
300
—
(337)
112,007
—
—
—
(3,031)
—
—
(18,854)
2
(3,658)
—
4,934
—
(333)
20,295
—
16,754
—
2,204
(47,373)
(33,229)
(1,235)
2
(3,809)
—
14,312
41,399
—
—
—
—
8,199
3,057
17,623
22,880
41,399
4,548
132,378
34,821
16,018
8,199
2,230
—
—
9,521
—
—
(40,522)
(33,992)
(30,828)
9,245
(12,530)
—
—
(105)
43
—
—
1,273 $
—
—
(4,076)
(2)
—
(5,379)
122,499 $
46,063
6,209
2,790
(73)
4,242
(9,667)
45,447
—
9,737
—
(8,649)
—
9,881
—
—
9,420
— (15,046)
235,337 $ (196,266) $ 608,089
Weighted Average Diluted Share . . . $
1.61 $
— $
0.44 $
0.85 $
(0.71) $
2.19
84
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment’s Distributable Earnings increased by $100.7 million, from
$450.9 million during the year ended December 31, 2019 to $551.6 million during the year ended December 31, 2020.
After making adjustments for the calculation of Distributable Earnings, revenues were $748.8 million, costs and
expenses were $221.6 million, other income was $39.0 million and income tax provision was $14.6 million.
Revenues, consisting principally of interest income on loans, increased by $56.4 million during the year ended
December 31, 2020, primarily due to an increase in interest income from loans of $55.2 million and rental income from
foreclosed properties of $4.7 million, partially offset by a decrease in interest income from investment securities of $3.0
million. The increase in interest income from loans was principally due to (i) higher prepayment related income and
(ii) higher average balances of both commercial and residential loans, partially offset by (iii) lower average LIBOR rates
(partially mitigated by the LIBOR floors on most of our commercial loans). The decrease in interest income from
investment securities was primarily due to lower average balances, lower average LIBOR rates and lower prepayment
related income for our single-borrower CMBS, partially offset by higher average RMBS investment balances.
Costs and expenses decreased by $32.8 million during the year ended December 31, 2020, primarily due to a
$45.9 million decrease in interest expense associated with the various secured financing facilities used to fund a portion
of this segment’s investment portfolio primarily due to lower average LIBOR rates partially offset by higher average
borrowings outstanding. Such decrease was partially offset by higher general and administrative and other expenses.
Other income increased by $20.9 million, primarily due to a $39.2 million increase in residential loan
securitization gains, partially offset by a $6.1 million unfavorable change in gains (losses) recognized on other loans and
investments, a $5.4 million unfavorable change in foreign currency gains (losses), a $4.4 million increase in realized
losses on derivatives principally related to the residential loans securitized and a $3.2 million decrease in earnings from
unconsolidated entities.
Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization
activities which are housed in TRSs, increased $9.8 million due to an increase in taxable income of those TRSs during
the year ended December 31, 2020.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s Distributable Earnings increased by $6.3 million, from $16.6 million
during the year ended December 31, 2019 to $22.9 million during the year ended December 31, 2020. After making
adjustments for the calculation of Distributable Earnings, revenues were $81.0 million, costs and expenses were $56.7
million and other loss was $1.2 million.
Revenues, consisting principally of interest income on loans, decreased by $25.6 million during the year ended
December 31, 2020, primarily due to decreases in interest income from loans of $21.7 million and investment securities
of $3.7 million. The decrease in interest income from loans was primarily due to a decrease in average LIBOR rates and
lower average loan balances outstanding as a result of sales and repayments, partially offset by an increase in average
spreads on our infrastructure loans. The decrease in interest income from investment securities was primarily due to
lower prepayment related income and average investment balances outstanding.
Costs and expenses decreased by $21.8 million during the year ended December 31, 2020, primarily due to a
decrease in interest expense on the secured debt facilities used to finance this segment’s investment portfolio principally
due to lower average LIBOR rates and lower average borrowings as a result of loan sales and repayments.
Other loss decreased by $10.4 million, primarily due to a decreased loss on extinguishment of debt resulting
from the write-off of deferred financing fees relating to partial debt prepayments from proceeds of loan repayments and
sales.
85
Property Segment
Distributable Earnings by Portfolio (amounts in thousands)
For the Year Ended
December 31,
Master Lease Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,110 $
Medical Office Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Woodstar I Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Woodstar II Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ireland Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other/Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,864
22,036
24,206
—
—
(4,100)
Distributable Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,116 $
2020
Change
2019
16,866 $
18,965
29,367
23,090
84,321
(139,534)
(4,033)
29,042 $
244
899
(7,331)
1,116
(84,321)
139,534
(67)
50,074
The Property Segment’s Distributable Earnings increased by $50.1 million, from $29.0 million during the year
ended December 31, 2019 to $79.1 million during the year ended December 31, 2020. After making adjustments for the
calculation of Distributable Earnings, revenues were $254.1 million, costs and expenses were $168.4 million and other
loss was $6.6 million.
Revenues decreased by $32.6 million during the year ended December 31, 2020, primarily due to the sale of the
Ireland Portfolio in December 2019, partially offset by increased rental income in the Woodstar Portfolios due to rental
rate increases effective May 2019.
Costs and expenses decreased by $12.1 million during the year ended December 31, 2020, primarily due to the
sale of the Ireland Portfolio in December 2019.
Other loss decreased by $70.2 million during the year ended December 31, 2020, primarily due to a $139.5
million other-than-temporary loss recognized on our investment in the Retail Fund in 2019, partially offset by a $60.1
million gain on sale of the Ireland Portfolio in 2019, both of which did not recur in 2020.
Investing and Servicing Segment
The Investing and Servicing Segment’s Distributable Earnings decreased by $117.2 million, from $238.0
million during the year ended December 31, 2019 to $120.8 million during the year ended December 31, 2020. After
making adjustments for the calculation of Distributable Earnings, revenues were $199.4 million, costs and expenses
were $120.0 million, other income was $58.7 million, income tax benefit was $0.6 million and the deduction of income
attributable to non-controlling interests was $17.9 million.
Revenues decreased by $71.5 million during the year ended December 31, 2020, primarily due to decreases of
$30.2 million in interest income from CMBS and conduit loans, $28.2 million in servicing fees and $13.0 million in
rental income from our REIS Equity Portfolio primarily due to fewer properties held. The decrease in interest income
primarily reflects a $16.1 million decrease in interest recoveries on CMBS and lower average balances of conduit loans
held-for-sale. The treatment of CMBS interest income on a GAAP basis is complicated by our application of the ASC
810 consolidation rules. In an attempt to treat these securities similar to the trust’s other investment securities, we
compute interest income pursuant to an effective yield methodology. In doing so, we segregate the portfolio into various
categories based on the components of the bonds’ cash flows and the volatility related to each of these components. We
then accrete interest income on an effective yield basis using the components of cash flows that are reliably estimable.
Other minor adjustments are made to reflect management’s expectations for other components of the projected cash flow
stream.
Costs and expenses decreased by $21.3 million during the year ended December 31, 2020, primarily due to
decreases of $9.3 million in interest expense on borrowings related to properties held and conduit loans, $7.6 million in
costs of rental operations due to fewer properties held and $5.0 million in general and administrative expenses reflecting
lower compensation costs.
86
Other income includes profit realized upon securitization of loans by our conduit business, gains on sales of
CMBS and operating properties, gains and losses on derivatives that were either effectively terminated or novated, and
earnings from unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic
servicing rights intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair
value due to the attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk
and credit risk on our conduit loans. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair
value, with all changes in fair value (realized or unrealized) recognized in earnings. The adjustments to Distributable
Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Other income decreased
by $62.9 million principally due to (i) a $47.9 million decrease in gains on sales of properties, (ii) a $20.8 million
increase in other-than-temporary CMBS losses and (iii) an $ $8.6 million decrease in realized gains on conduit loans, all
partially offset by (iv) a $12.9 million increase in fair value of servicing rights.
Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan
securitization business which are housed in TRSs, decreased $8.7 million from a provision of $8.1 million to a benefit of
$0.6 million due to an overall tax loss of those TRSs during the year ended December 31, 2020.
Income attributable to non-controlling interests increased $12.8 million primarily relating to income of a
consolidated CMBS joint venture in which we hold a 51% interest.
Corporate
Corporate costs and expenses decreased by $16.6 million, from $205.7 million during the year ended
December 31, 2018 to $189.1 million during the year ended December 31, 2020, primarily due to (i) a $14.4 million
favorable change in realized gain (loss) on interest rate swaps which hedge a portion of our unsecured senior notes used
to repay variable-rate secured financing and (ii) a $1.9 million decrease in loss on extinguishment of debt.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Commercial and Residential Lending Segment
The Commercial and Residential Lending Segment’s Distributable Earnings increased by $5.7 million, from
$445.2 million during the year ended December 31, 2018 to $450.9 million during the year ended December 31, 2019.
After making adjustments for the calculation of Distributable Earnings, revenues were $692.4 million, costs and
expenses were $254.4 million and other income was $18.1 million.
Revenues, consisting principally of interest income on loans, increased by $65.2 million during the year ended
December 31, 2019, primarily due to increases in interest income from loans of $33.8 million and investment securities
of $31.3 million. The increase in interest income from loans was principally due to (i) higher average LIBOR rates,
(ii) higher average balances of both commercial and residential loans and (iii) higher levels of prepayment related
income, partially offset by (iv) the compression of interest rate spreads in credit markets and (v) the recognition in the
2018 period of a $15.1 million profit participation in a mortgage loan that was repaid in 2016. The increase in interest
income from investment securities was primarily due to higher average investment balances.
Costs and expenses increased by $66.9 million during the year ended December 31, 2019, primarily due to a
$61.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion
of our investment portfolio.
Other income increased by $8.3 million, primarily due to a $4.7 million increase in net gains resulting from
prepayments and sales of commercial and residential loans and a $3.7 million increase in earnings from unconsolidated
entities.
87
Infrastructure Lending Segment
The Infrastructure Lending Segment had Distributable Earnings of $16.6 million for the year ended
December 31, 2019 compared to $1.3 million during the post-acquisition period from September 19, 2018 through
December 31, 2018. After making adjustments for the calculation of Distributable Earnings, revenues were $106.6
million, costs and expenses were $78.5 million and other loss was $11.6 million.
Revenues of $106.6 million primarily consisted of interest income of $99.6 million from loans and $6.3 million
from investment securities.
Costs and expenses of $78.5 million primarily consisted of $62.8 million of interest expense on the secured debt
facilities used to finance this segment’s investment portfolio and $15.6 million of general and administrative expenses.
Other loss of $11.6 million principally reflects an $11.4 million loss on extinguishment of debt resulting from
the write-off of deferred financing fees relating to partial debt prepayments from proceeds of loan repayments and sales.
Property Segment
Distributable Earnings by Portfolio (amounts in thousands)
For the Year Ended December 31,
Master Lease Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Medical Office Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Woodstar I Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Woodstar II Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ireland Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other/Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributable Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
16,866
18,965
29,367
23,090
84,321
(139,534)
(4,033)
29,042
$
$
2018
40,271
25,440
26,106
17,218
18,285
—
(4,821)
Change
$ (23,405)
(6,475)
3,261
5,872
66,036
(139,534)
788
122,499 $ (93,457)
The Property Segment’s Distributable Earnings decreased by $93.5 million, from $122.5 million during the
year ended December 31, 2018 to $29.0 million during the year ended December 31, 2019. After making adjustments for
the calculation of Distributable Earnings, revenues were $286.7 million, costs and expenses were $180.5 million and
other loss was $76.8 million.
Revenues decreased by $4.8 million during the year ended December 31, 2019, primarily due to a decrease in
rental income from the Master Lease Portfolio due to (i) the sale of seven properties within the Master Lease Portfolio
during 2018 and (ii) no longer recording as revenues and offsetting expenses property taxes paid directly by lessees, in
accordance with the new lease accounting standard effective January 1, 2019 in both the Master Lease and Medical
Office Portfolios, partially offset by (iii) the full period inclusion of rental income from the Woodstar II Portfolio, which
was acquired over a period between December 2017 and September 2018, and (iv) rental rate increases in both Woodstar
Portfolios.
Costs and expenses decreased by $2.6 million during the year ended December 31, 2019, primarily due to the
sale of seven properties from the Master Lease Portfolio in 2018 and no longer recording property taxes paid directly by
lessees, both as discussed above, mostly offset by the full period inclusion of the Woodstar II Portfolio.
Other income (loss) decreased by $98.4 million during the year ended December 31, 2019, primarily due to a
$139.5 million loss recognized on our investment in the Retail Fund. This loss reflects the full write-off of our
investment due to decreases in fair value of properties held by the Retail Fund which management determined to be
other than temporary. Partially offsetting this loss was a $37.0 million increase in realized gains on property sales,
reflecting a $60.1 million gain on sale of the Ireland Portfolio in December 2019 compared to gains of $23.1 million on
the sales of seven properties in the Master Lease Portfolio during the year ended December 31, 2018.
The $60.1 million gain on sale of the Ireland Portfolio relates to the sale of the U.S. entity which held the net
assets related to our Ireland Portfolio. The properties within the entity were sold for a gross purchase price of €530.0
million. After certain adjustments, including a €20.7 million tax withholding which was treated as a reduction of
88
purchase price, the net purchase price was €507.6 million, plus estimated net working capital. Our undepreciated cost
basis in these assets was €462.2 million. The resulting gain, after selling costs, was €40.5 (or $44.9) million. In addition,
upon receipt of the net proceeds from the sale, we unwound all of our foreign currency hedges related to this portfolio,
realizing a net gain of $15.2 million, bringing the total distributable gain on sale of this portfolio to $60.1 million.
Investing and Servicing Segment
The Investing and Servicing Segment’s Distributable Earnings increased by $2.7 million, from $235.3 million
during the year ended December 31, 2018 to $238.0 million during the year ended December 31, 2019. After making
adjustments for the calculation of Distributable Earnings, revenues were $270.9 million, costs and expenses were $141.3
million, other income was $121.6 million, income tax provision was $8.1 million and the deduction of income
attributable to non-controlling interests was $5.1 million.
Revenues decreased by $50.8 million during the year ended December 31, 2019, primarily due to decreases of
$33.9 million in servicing fees, $10.3 million in interest income from our CMBS portfolio and $5.8 million in rental
income from our REIS Equity Portfolio due to fewer properties held.
Costs and expenses increased by $4.8 million during the year ended December 31, 2019, primarily due to a $6.2
million increase in interest expense principally related to the financing of our CMBS portfolio, partially offset by a $2.5
million decrease in costs of rental operations due to fewer properties held.
Other income increased by $61.6 million principally due to (i) a $23.3 million increase in gains on sales of
properties, (ii) a $17.8 million increase in realized gains on conduit loans, (iii) a $12.9 million lesser decrease in fair
value of servicing rights, (iv) an $11.6 million increase in earnings from unconsolidated entities and (v) a $6.2 million
increase in net recognized gains on CMBS investments, all partially offset by (vi) an $11.3 million unfavorable change
in realized gains (losses) on derivatives.
Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan
securitization businesses which are housed in TRSs, increased $3.4 million due to an increase in taxable income of those
TRSs.
Income attributable to non-controlling interests decreased $0.1 million.
Corporate
Corporate costs and expenses increased by $9.4 million, from $196.3 million during the year ended
December 31, 2018 to $205.7 million during the year ended December 31, 2019, primarily due to (i) a $9.5 million
unfavorable change in gain (loss) on extinguishment of debt primarily due to the $10.0 million positive adjustment to
Distributable Earnings during the year ended December 31, 2018 upon the repayment at maturity of the 2018
Convertible Notes, as described above, (ii) a $3.8 million increase in base management fees and (iii) a $2.5 million
unfavorable change in gain (loss) on interest rate swaps, all partially offset by (iv) an $8.4 million decrease in interest
expense principally on lower average outstanding balances of our unsecured senior notes.
89
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. We expect to preserve and build our liquidity to best position the Company to weather near-term market
uncertainty, satisfy our loan future funding and financing obligations and to potentially make opportunistic new
investments, which will cause us to take some or all of the following actions: raise capital from offerings of securities,
borrow additional capital, sell assets, pay our management and incentive fees in shares of our common stock (as was
done for the quarter ended March 31, 2020) and/or change our dividend practice, including by reducing the amount of,
or temporarily suspending, our future dividends or paying our future dividends in kind for some period of time. We
currently expect the pace of loan repayments to slow while the impacts of the COVID-19 pandemic are ongoing.
COVID-19 Pandemic
We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our
commercial and residential real estate-related loans and infrastructure loans (and their tenants), the tenants in the
properties we own, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of
the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the
pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. Further discussion of the
potential impacts on us from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item
1A of this Form 10-K.
Credit Facilities
Shortly after the initial outbreak of the COVID-19 pandemic, we entered into agreements with certain of our
secured credit facility lenders in our commercial lending portfolio to temporarily suspend credit mark provisions on
certain of their portfolio assets in exchange for: (i) cash repayments; (ii) pledges of additional collateral; and
(iii) reductions of available borrowings.
We are in frequent, consistent dialogue with the providers of our secured credit facilities regarding our
management of their collateral assets in light of the impacts of the COVID-19 pandemic, including the determination of
whether any extensions to these agreements are necessary as these temporary suspensions expire. Our in-house asset
management team, along with an experienced team of workout professionals within our special servicer, are skilled in
managing loans throughout cycles, which we believe will assist us in achieving maximum resolution on any assets
impacted by the COVID-19 pandemic.
No such modifications or agreements were made with lenders on credit facilities related to our property,
residential lending or infrastructure lending portfolios.
90
Sources of Liquidity
Our primary sources of liquidity are as follows:
Cash Flows for the Year Ended December 31, 2020 (amounts in thousands)
GAAP
1,045,548 $
VIE
Excluding Investing
Adjustments and Servicing VIEs
866,716
(178,832) $
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . $
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment . . . . . . . . . . . . .
Proceeds from principal collections and sale of loans . . . . . . . . . . . . . .
Purchase and funding of investment securities . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and collections of investment securities . . . . . . . . .
Proceeds from sales of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases and additions to properties and other assets . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of interest in unconsolidated entities . . . . . . . . . . . .
Net cash flows from other investments and assets . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Financing Activities:
(3,133,196)
2,200,475
(22,408)
91,473
24,541
(25,164)
(3,133)
10,313
(54,706)
(911,805)
—
—
(331,784)
245,415
—
—
—
—
45
(86,324)
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal repayments on and repurchases of borrowings . . . . . . . . . . . .
Payment of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from common stock issuances, net of offering costs . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions from non-controlling interests . . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . .
Distributions of cash from consolidated VIEs . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash, cash equivalents and restricted cash . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, beginning of year . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, end of year . . . . . . . . . . . . . . . . $
7,100,563
(6,137,778)
(27,122)
1,003
(546,885)
11,775
(99,512)
(33,828)
187,494
(522,348)
79,921
13,283
147,026
574,031
1,105
722,162 $
22,000
(13,950)
—
—
—
—
2,622
—
(187,494)
522,348
(79,921)
265,605
449
(1,221)
—
(772) $
(3,133,196)
2,200,475
(354,192)
336,888
24,541
(25,164)
(3,133)
10,313
(54,661)
(998,129)
7,122,563
(6,151,728)
(27,122)
1,003
(546,885)
11,775
(96,890)
(33,828)
—
—
—
278,888
147,475
572,810
1,105
721,390
The discussion below is on a non - GAAP basis, after removing adjustments principally resulting from the
consolidation of the securitization VIEs under ASC 810. These adjustments principally relate to (i) the purchase of
CMBS, RMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP
basis and (ii) principal collections of CMBS and RMBS related to consolidated VIEs, which are reflected as VIE
distributions on a GAAP basis. There is no significant net impact to overall cash resulting from these consolidations.
Refer to Note 2 to the Consolidated Financial Statements for further discussion.
Cash and cash equivalents decreased by $147.5 million during the year ended December 31, 2020, reflecting
net cash used in investing activities of $998.1 million, partially offset by net cash provided by operating activities of
$866.7 million and net cash provided by financing activities of $278.9 million.
Net cash provided by operating activities of $866.7 million during the year ended December 31, 2020 related
primarily to proceeds from sales of loans held-for-sale, net of originations and purchases, of $550.8 million and cash
interest income of $536.7 million from our loans and $154.7 million from our investment securities. Net rental income
provided cash of $172.7 million and servicing fees provided cash of $43.3 million. Offsetting these cash inflows was
cash interest expense of $379.9 million, general and administrative expenses of $115.0 million, management fees of
$75.6 million and a net change in operating assets and liabilities of $24.0 million.
Net cash used in investing activities of $998.1 million for the year ended December 31, 2020 related primarily
to the origination and acquisition of loans held-for-investment of $3.1 billion and the purchase and funding of
91
investment securities of $354.2 million, partially offset by proceeds received from principal collections and sales of
loans of $2.2 billion and investment securities of $336.9 million.
Net cash provided by financing activities of $278.9 million for the year ended December 31, 2020 related
primarily to borrowings on our secured debt, net of repayments and deferred loan costs, of $1.1 billion, partially offset
by dividend distributions of $546.9 million, borrowings on our unsecured debt, net of repayments and deferred loan
costs, of $203.7 million, net distributions to non-controlling interests of $96.9 million and treasury stock purchases of
$33.8 million.
Financing Arrangements
We utilize a variety of financing arrangements, including:
1) Repurchase Agreements: Repurchase agreements effectively allow us to borrow against loans and
securities that we own. Under these agreements, we sell our loans and securities to a counterparty and agree
to repurchase the same loans and securities from the counterparty at a price equal to the original sales price
plus interest. The counterparty retains the sole discretion over both whether to purchase the loan and
security from us and, subject to certain conditions, the market value of such loan or security for purposes of
determining whether we are required to pay margin to the counterparty. Generally, if the lender determines
(subject to certain conditions) that the market value of the collateral in a repurchase transaction has
decreased by more than a defined minimum amount, we would be required to repay any amounts borrowed
in excess of the product of (i) the revised market value multiplied by (ii) the applicable advance rate.
During the term of a repurchase agreement, we receive the principal and interest on the related loans and
securities and pay interest to the counterparty. As of December 31, 2020, we had various repurchase
agreements, with details referenced in the table provided below.
2) Secured Property Financings: We use long-term mortgage facilities from commercial lenders and
government sponsors of affordable housing loans to finance many of the investment properties that we
hold. These facilities accrue interest at either fixed or floating rates. We typically hedge our exposure to
floating interest rate changes on these facilities through the use of interest rate swap and cap derivatives.
3) Bank Credit Facilities: We use bank credit facilities (including term loans and revolving facilities) to
finance our assets. These financings may be collateralized or non - collateralized and may involve one or
more lenders. Credit facilities typically have maturities ranging from two to five years and may accrue
interest at either fixed or floating rates. The lender retains the sole discretion, subject to certain conditions,
over the market value of such note for purposes of determining whether we are required to pay margin to
the lender.
4) Loan Sales, Syndications and Securitizations: We seek non - recourse long - term financing from loan sales,
syndications and/or securitizations of our investments in mortgage loans. The sales, syndications or
securitizations generally involve a senior portion of our loan but may involve the entire loan. Loan sales
and syndications generally involve the sale of a senior note component or participation interest to a third
party lender. Securitization generally involves transferring notes to a special purpose vehicle (or the issuing
entity), which then issues one or more classes of non - recourse notes pursuant to the terms of an indenture.
The notes are secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we
receive cash proceeds from the sale of non - recourse notes. Sales, syndications or securitizations of our
portfolio investments might magnify our exposure to losses on those portfolio investments because the
retained subordinate interest in any particular overall loan would be subordinate to the loan components
sold and we would, therefore, absorb all losses sustained with respect to the overall loan before the owners
of the senior notes experience any losses with respect to the loan in question.
5) Unsecured Senior Notes: We issue senior notes, some of which are convertible, to finance certain operating
and investing activities of the Company. These senior notes accrue interest at fixed interest rates and vary
in tenure. Refer to Note 11 to the Consolidated Financial Statements for further discussion.
92
6) Federal Home Loan Bank Financing: As a member of the FHLB of Chicago, we had the ability to borrow
funds from the FHLB of Chicago at both fixed and variable rates to finance eligible collateral, which
included residential loans. This facility expired in February 2021.
Secured Borrowings
The following table is a summary of our secured borrowings as of December 31, 2020 (dollars in thousands):
Current
Maturity
Extended
Maturity (a)
Repurchase Agreements:
May 2021 to
May 2023 to
Weighted
Average
Pricing
Pledged
Asset
Carrying
Value
Maximum
Facility
Size
Approved
Outstanding
Balance
but
Unallocated
Undrawn Financing
Capacity (b) Amount (c)
Commercial Loans . . .
Aug 2025 (d)
Jun 2022 to
Residential Loans . . .
Oct 2023
Infrastructure Loans . . Feb 2022
Conduit Loans . . . . . .
Feb 2021 to
Jun 2023
Jan 2021 to
Oct 2030
Mar 2029 (d)
(e)
$ 7,154,627
$ 8,783,716 (f) $ 4,878,939 $ 112,355 $ 3,792,422
N/A
N/A
Feb 2022 to
Jun 2024
Dec 2021 to
LIBOR + 2.64%
LIBOR + 2.00%
36,465
278,174
750,000
500,000
22,590
232,961
—
—
727,410
267,039
LIBOR + 2.10%
76,613
350,000
53,554
—
296,446
CMBS/RMBS . . . . . .
(g)
Total Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Apr 2031 (g)
(h)
1,116,212
8,662,091
770,656
11,154,372
620,763 (i)
5,808,807
—
149,893
112,355 5,233,210
Other Secured
Financing:
Borrowing
Base Facility . . . . . . Apr 2022
Apr 2024
Commercial
Financing Facility . . Mar 2022
Mar 2029
LIBOR + 2.25%
GBP LIBOR +
1.75%
Residential
56,127
650,000 (j)
43,014
—
606,986
100,714
81,218
81,218
—
—
Financing Facility . . Sep 2022
Sep 2025
3.50%
298,008
250,000
215,024
—
34,976
Infrastructure
Infrastructure
Acquisition Facility . Sep 2021
Jul 2022 to
Oct 2022
Nov 2024 to
Financing Facilities .
Property Mortgages -
Sep 2022
Oct 2024 to
Jul 2027
(k)
575,193
571,690
467,450
—
104,240
LIBOR +2.06%
663,702
1,250,000
538,645
—
711,355
Fixed rate . . . . . . . .
Aug 2052 (l)
N/A
4.00%
1,280,300
1,077,572
1,077,528
—
44
Property Mortgages -
Variable rate . . . . . .
Nov 2021 to
Jul 2030
Term Loan and
Revolver . . . . . . . .
(n)
FHLB . . . . . . . . . . . Feb 2021
Collateralized Loan
N/A
N/A
N/A
(m)
(n)
2.06%
938,979
986,200
960,903
—
25,297
N/A
598,027
(n)
765,000
400,000
645,000
396,000
120,000
—
—
4,000
Jul 2038
Obligation . . . . . . .
LIBOR + 1.34%
Total Other Secured Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
936,375
6,968,055
$ 18,122,427
Unamortized net discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,099,439
5,610,489
$ 14,272,580
N/A
936,375
5,361,157
—
120,000 1,486,898
$ 11,169,964 $ 232,355 $ 6,720,108
—
(13,569)
(79,651)
$ 11,076,744
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Subject to certain conditions as defined in the respective facility agreement.
Approved but undrawn capacity represents the total draw amount that has been approved by the lenders related to those assets that have been
pledged as collateral, less the drawn amount.
Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the lenders.
For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject
to certain specified conditions.
Certain facilities with an outstanding balance of $1.5 billion as of December 31, 2020 are indexed to GBP LIBOR and EURIBOR. The
remainder have a weighted average rate of LIBOR + 2.03%.
The aggregate initial maximum facility size of $8.8 billion may be increased at our option, subject to certain conditions. This amount includes
such upsizes.
Certain facilities with an outstanding balance of $271.0 million as of December 31, 2020 carry a rolling 11-month or 12-month term which
may reset monthly or quarterly with the lender's consent. These facilities carry no maximum facility size.
A facility with an outstanding balance of $212.2 million as of December 31, 2020 has a weighted average fixed annual interest rate of 3.29%.
All other facilities are variable rate with a weighted average rate of LIBOR + 1.80%.
93
(i)
(j)
(k)
(l)
(m)
(n)
Includes: (i) $212.2 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $41.3 million outstanding on one of
our repurchase facilities that represents the 49% pro rata share owed by a non-controlling partner in a consolidated joint venture (see Note 15
to the Consolidated Financial Statements).
The initial maximum facility size of $300.0 million may be increased to $650.0 million, subject to certain conditions.
Consists of an annual interest rate of the applicable currency benchmark index + 2.00%.
The weighted average maturity is 6.8 years as of December 31, 2020.
Includes a $600.0 million first mortgage and mezzanine loan secured by our Medical Office Portfolio. This debt has a weighted average
interest rate of LIBOR + 2.07% that we swapped to a fixed rate of 3.34%. The remainder have a weighted average rate of LIBOR + 2.59%.
Consists of: (i) a $645.0 million term loan facility that matures in July 2026, of which $395.0 million has an annual interest rate of LIBOR +
2.50% and $250.0 million has an annual interest rate of LIBOR + 3.50%, subject to a 75 bps LIBOR floor, and (ii) a $120.0 million revolving
credit facility that matures in July 2024 with an annual interest rate of LIBOR + 3.00%. These facilities are secured by the equity interests in
certain of our subsidiaries which totaled $4.0 billion as of December 31, 2020.
Refer to Note 10 to the Consolidated Financial Statements for a detailed discussion of new secured credit
facilities and amendments to existing credit facilities entered into during the year ended December 31, 2020.
Variance between Average and Quarter - End Credit Facility Borrowings Outstanding
The following tables compare 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):
Quarter Ended
March 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quarter-End
Balance
10,714,680
9,858,371
10,638,537
11,169,964
Weighted-Average
Balance During
Explanations
for Significant
Variance Variances
Quarter
10,194,276
10,218,089
10,151,695
10,945,199
520,404
(359,718)
486,842
224,765
(a)
(b)
(c)
(d)
(a) Variance primarily due to the following: (i) drawing on all available credit facilities at quarter end and
(ii) borrowings on two new lending facilities.
(b) Variance primarily due to the late quarter timing of a residential loan securitization, which resulted in a $387.4
million paydown of the FHLB facility, partially offset by the late quarter timing of the refinancing of our Woodstar I
Portfolio, which resulted in net additional borrowings of $100.1 million.
(c) Variance primarily due to the following: (i) late quarter timing of conduit loan fundings and (ii) the closing of a
large European loan pledged to two commercial credit facilities.
(d) Variance primarily due to the following: (i) late quarter timing of fundings on commercial loan facilities and
(ii) borrowings on the Residential Financing Facility.
Quarter Ended
March 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,305,605 $
9,359,610
June 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,266,704
September 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,936,500
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance
Quarter-End
Explanations
for Significant
Variances
Variance
Weighted-Average
Balance During
Quarter
9,766,206 $ (460,601)
9,503,479 (143,869)
149,949
9,116,755
400,661
9,535,839
(a)
(b)
(c)
(d)
(a) Variance primarily due to the late quarter timing of commercial loan sales and loan repayments, all of which
resulted in paydowns of the corresponding credit facilities which financed these assets.
(b) Variance primarily due to loan repayments on the Infrastructure Acquisition Facility and Commercial Loans
repurchase facilities.
94
(c) Variance primarily due to the net increase in debt related to the CLO issuance in August 2019.
(d) Variance primarily due to the late quarter timing of fundings on commercial loan facilities and borrowings on a new
Infrastructure Financing Facility.
Borrowings under Unsecured Senior Notes
During the years ended December 31, 2020 and 2019, the weighted average effective borrowing rate on our
unsecured senior notes was 5.0% and 4.9%, 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.
Refer to Note 11 to the 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 on amounts
outstanding and extended contractual maturities of those investments as of December 31, 2020. The projected and/or
required repayments of financing were based on the earlier of (i) the extended contractual maturity of each credit facility
or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the
respective credit facility (amounts in thousands):
Scheduled Principal Scheduled/Projected Projected/Required Scheduled Principal
Repayments on Loans Principal Repayments Repayments of
and HTM Securities
on RMBS and CMBS
Financing
First Quarter 2021 . . . . . . . . . . . . . .
Second Quarter 2021 . . . . . . . . . . . .
Third Quarter 2021 . . . . . . . . . . . . .
Fourth Quarter 2021 . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . $
532,161
485,580
78,223
95,389
1,191,353 $
7,293
14,319
7,172
6,393
35,177 $
Inflows Net of
(680,127)(a)
(92,045)
(15,012)
(1,046,017)(b)
(1,833,201)
Financing Outflows
(140,673)
407,854
70,383
(944,235)
(606,671)
$
(a)
$396.0 million represents borrowings with the FHLB associated with our residential loans, most of which are
intended for securitization. These borrowings were repaid in the first quarter of 2021 and the loans were
transitioned to alternate facilities.
(b)
$700.0 million represents the maturity of our Senior Notes due December 2021.
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 December 31, 2020, we
had 100,000,000 shares of preferred stock available for issuance and 215,357,090 shares of common stock available for
issuance.
Refer to Note 17 to the Consolidated Financial Statements for a discussion of our issuances of equity securities
in recent years.
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 senior loan interests and other assets.
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Repurchases of Equity Securities and Convertible Senior Notes
In February 2020, our board of directors authorized the repurchase of up to $400.0 million of our outstanding
common shares and convertible senior notes over a period of one year. 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 are
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 year ended December 31, 2020, we repurchased $33.8 million
of common stock and no convertible senior notes under the repurchase program. As of December 31, 2020, we have
$366.2 million of remaining capacity to repurchase common stock and/or convertible senior notes under the repurchase
program.
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 15 to the Consolidated Financial
Statements for further discussion.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable
income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular
corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We generally intend to
distribute substantially all of our taxable income (which does not necessarily equal our GAAP net income) to our
stockholders each year, if and to the extent authorized by our board of directors. Before we pay any dividend, whether
for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements.
If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow
funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock
distribution or distribution of debt securities. Refer to Note 17 to the Consolidated Financial Statements for a detailed
dividend history.
The tax treatment for our aggregate distributions per share of common stock paid with respect to the 2020 tax
year is as follows:
Per Share
Ordinary Taxable
Qualified
Taxable
Capital Gain
Record Date Payable Date Dividend Paid Dividends Dividends Distribution
12/31/2019
3/31/2020
6/30/2020
9/30/2020
0.4721 $ 0.3800 $ 0.0482 $
0.4800
0.4800
0.4800
1.9121 $ 1.5392 $ 0.1952 $
1/15/2020 $
4/15/2020
7/15/2020
10/15/2020
0.0149 $
0.0151
0.0151
0.0151
0.0602 $
0.3864
0.3864
0.3864
0.0490
0.0490
0.0490
$
Unrecaptured Nondividend Section 199A
Distributions
1250 Gain
Dividends
0.0015 $
0.0015
0.0015
0.0015
0.0060 $
0.0772 $
0.0785
0.0785
0.0785
0.3127 $
0.3318
0.3374
0.3374
0.3374
1.3440
The fourth quarter dividend paid in January of 2021 will be treated as a 2021 dividend for federal tax purposes.
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Leverage Policies
We employ leverage, to the extent available, to fund the acquisition of our target assets, increase potential
returns to our stockholders, or provide temporary liquidity. Leverage can be either direct by utilizing private third party
financing or indirect through originating, acquiring or retaining subordinated mortgages, B - Notes, subordinated loan
participations or mezzanine loans. Although the type of leverage we deploy is dependent on the underlying asset that is
being financed, we intend, when possible, to utilize leverage whose maturity is equal to or greater than the maturity of
the underlying asset and minimize to the greatest extent possible exposure to the Company of credit losses associated
with any individual asset. In addition, we intend to mitigate the impact of potential future interest rate increases on our
borrowings through utilization of hedging instruments, primarily interest rate swap agreements.
The amount of leverage we deploy for particular investments in our target assets depends upon our Manager’s
assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the assets in our
investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our
assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the
creditworthiness of our financing counterparties, the health of the U.S. and European economy and commercial,
residential and infrastructure markets, our outlook for the level, slope and volatility of interest rates, the credit quality of
our assets, the collateral underlying our assets and our outlook for asset spreads relative to the LIBOR curve. Our
secured debt agreements contain customary affirmative and negative covenants, including financial covenants, that in
some cases restrict our total leverage (as defined therein). As of December 31, 2020, we were in compliance with all
such covenants.
Contractual Obligations and Commitments
Contractual obligations as of December 31, 2020 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) . . . . . . . . . . . . . . . . . . $ 10,233,589 $ 816,447 (b) $ 1,861,759 $ 4,631,225 $ 2,924,158
936,375
Collateralized loan obligations . . . . . . . . . . .
—
Unsecured senior notes . . . . . . . . . . . . . . . . .
Loan and preferred equity interest
funding commitments (c) . . . . . . . . . . . . . .
Infrastructure Lending Segment
commitments (d) . . . . . . . . . . . . . . . . . . . . .
166,294
7,022
Future lease commitments (e). . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,492,565 $ 2,580,739
—
15,451
$ 2,889,632 $ 5,146,210 $ 3,875,984
936,375
1,750,000
—
500,000
—
550,000
—
700,000
201,155
29,507
34,861
3,499
—
3,535
1,341,939
439,513
890,976
11,450
—
(a) Represents the contractual maturity of the respective credit facility, inclusive of available extension options. If
investments that have been pledged as collateral repay earlier than the contractual maturity of the debt, the related
portion of the debt would likewise require earlier repayment. Refer to Note 10 to the Consolidated Financial
Statements for the expected maturities by year.
(b) $396.0 million represents borrowings with the FHLB associated with our residential loans, most of which are
intended for securitization. These borrowings were repaid in the first quarter of 2021 and the loans were transitioned
to alternate facilities. $271.0 million represents borrowings under certain securities repurchase facilities that carry a
rolling term.
(c) Excludes $218.5 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 earlier than, or in excess of, expectations.
(d) Represents contractual commitments of $121.6 million under revolvers and letters of credit and $79.6 million under
delayed draw term loans
(e) Does not include commitments under leases which have not yet commenced.
97
The table above does not include interest payable, amounts due under our management agreement, amounts due
under our derivative agreements or amounts due under guarantees as those contracts do not have fixed and determinable
payments.
Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and
assessments upon which our financial statements are based were reasonable at the time made, based upon information
available to us at that time. The following discussion describes the critical accounting estimates that apply to our
operations and require complex management judgment. This summary should be read in conjunction with a more
complete discussion of our accounting policies included in Note 2 to the Consolidated Financial Statements.
Credit Losses
Loans and Debt Securities Measured at Amortized Cost
As discussed in Note 2 to the Consolidated Financial Statements, ASC 326, Financial Instruments – Credit
Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit
loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost,
instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the
consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the
occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our
loans held-for-investment (“HFI”) and our held-to-maturity (“HTM”) debt securities which are carried at amortized cost,
including future funding commitments and accrued interest receivable related to those loans and securities.
As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed
to third party database services to provide us with historical industry losses for both commercial real estate and
infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities
on a collective basis within our commercial real estate and infrastructure portfolios. Such determination also
incorporates significant assumptions and estimates regarding, among other things, prepayments, future fundings and
economic forecasts. See Note 5 to the Consolidated Financial Statements for further discussion of our methodologies.
We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly.
Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to
the contractual terms of the loan or security. If a loan or security is considered to be credit deteriorated, we depart from
the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized
cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual
effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.
Significant judgment is required when estimating future credit losses; therefore, actual results over time could
be materially different. As of December 31, 2020, we held $11.6 billion of loans and HTM securities measured at
amortized cost with expected future funding commitments of $1.4 billion. We recognized a credit loss provision of $43.2
million during the year ended December 31, 2020 and the related credit loss allowance was $89.2 million.
Available-for-Sale Debt Securities
Separate provisions of ASC 326 apply to our available-for-sale (“AFS”) debt securities which are carried at fair
value with unrealized gains and losses reported as a component of accumulated other comprehensive income (“AOCI”).
We are required to establish an initial credit loss allowance for those securities that are purchased with credit
deterioration by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance
for the difference between expected cash flows and contractual cash flows, both on a present value basis.
Subsequently, cumulative adverse changes in expected cash flows on our available-for-sale debt securities are
recognized currently as an increase to the credit loss allowance. However, the allowance is limited to the amount by
which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first
98
recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be
recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in
expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit
loss and is accounted for as a prospective yield adjustment.
Significant judgment is required when estimating expected cash flows used in determining the credit loss
allowance for AFS debt securities; therefore, actual results over time could be materially different. As of December 31,
2020, we held $167.3 million of AFS debt securities. We did not recognize any provision for credit losses with respect to
our AFS debt securities during the year ended December 31, 2020 and there was no related credit loss allowance as of
December 31, 2020.
Valuation of Financial Assets and Liabilities Carried at Fair Value
We measure our VIE assets and liabilities, 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. See Note 20 to the Consolidated Financial Statements for details
regarding the various methods and inputs we use in measuring the fair value of our financial assets and liabilities. As of
December 31, 2020, we had $65.5 billion and $62.8 billion of financial assets and liabilities, respectively, that are
measured at fair value, including $64.2 billion of VIE assets and $62.8 billion of VIE liabilities we consolidate pursuant
to ASC 810.
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
VIE, we maximize the use of observable inputs over unobservable inputs. As a result, the methods and inputs we use in
measuring the fair value of the assets and liabilities of our VIEs affect our earnings only to the extent of their impact on
our direct investment in the VIEs.
Goodwill Impairment
Our goodwill at December 31, 2020 of $259.8 million represents the excess of consideration transferred over
the fair value of net assets acquired in connection with the acquisitions of LNR in April 2013 and the Infrastructure
Lending Segment in September 2018 and October 2018. In testing goodwill for impairment, we follow ASC 350,
Intangibles—Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines
that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill,
then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it
is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or we
choose not to perform the qualitative assessment, then we compare the fair value of that reporting unit with its carrying
value, including goodwill, in a quantitative assessment. If the carrying value of a reporting unit exceeds its fair value,
goodwill is considered impaired with the impairment loss measured as the excess of the reporting unit’s carrying value
(inclusive of goodwill) over its fair value.
Based on our qualitative assessment during the fourth quarter of 2020, we believe that the Investing and
Servicing Segment reporting unit to which the LNR acquisition goodwill was attributed is not currently at risk of failing
a quantitative assessment. This qualitative assessment required judgment to be applied in evaluating the effects of
multiple factors, including actual and projected financial performance of the reporting unit, macroeconomic conditions,
industry and market conditions, and relevant entity specific events in determining whether it is more likely than not that
the fair value of the reporting unit is less than its carrying amount, including goodwill.
Based on our quantitative assessment during the fourth quarter of 2020, we determined that the fair value of the
Infrastructure Lending Segment reporting unit to which goodwill is attributed exceeded its carrying value including
goodwill. This quantitative assessment required judgment to be applied in determining the fair value of our equity in the
Infrastructure Lending Segment, which included estimates of future cash flows, terminal equity multiple and market
discount rate.
99
Property Impairment
We review properties for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Recoverability is determined by comparing the carrying amount of the
property to the undiscounted future net cash flows it is expected to generate. If such carrying amount exceeds the
expected undiscounted future net cash flows, we adjust the carrying amount of the property to its estimated fair value.
The estimation of future net cash flows and fair values of our properties involves significant judgments by our
management, and changes to these judgments could significantly impact our reported results of operations. As of
December 31, 2020, we held properties with a carrying value of $2.3 billion, none of which we determined were
impaired at any point during the year ended December 31, 2020.
Impairment of Investments in Unconsolidated Entities
Investments in unconsolidated entities are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable or each reporting period for certain other
investments accounted for under the fair value practicability election. An impairment loss is measured based on the
excess of the carrying amount of an investment over its estimated fair value. Impairment analyses are based on current
plans, intended holding periods, estimated fair values of underlying assets and available information at the time the
analyses are prepared. As of December 31, 2020, we held investments in unconsolidated entities with a carrying value of
$108.1 million. Although we did not record any impairment losses during the years ended December 31, 2020 or 2018,
we did record an impairment loss of $71.9 million as of December 31, 2019 in connection with our equity method
investment in the Retail Fund based on our estimated fair values of the underlying assets.
Recent Accounting Developments
Refer to Note 2 to the Consolidated Financial Statements for a discussion of recent accounting developments
and the expected impact to the Company.
Item 7A. 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.
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 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
December 31, 2020 and December 31, 2019 (dollars in thousands):
Face Value of
Loans Held-for-Sale Credit Index Instruments
Aggregate Notional Value of
Number of
Credit Index Instruments
4
5
69,000
89,000
December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . $
90,789 $
160,635 $
100
The COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced
occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development and
infrastructure projects currently planned or underway. These negative conditions have continued, and may continue into
the future and impair our borrowers’ ability to pay principal and interest due to us under our loan agreements and our
tenants’ ability to pay rent under various lease arrangements.
As discussed above, our asset management team reviews our investment portfolios and is in regular contact
with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. We have utilized
these relationships to address the potential impacts of the COVID-19 pandemic on the assets which secure our loans,
particularly hospitality assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic,
they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have
experienced other negative business consequences which have led to cash flow pressures at the underlying properties. In
some cases, these borrowers have requested temporary interest deferral or forbearance, or other modifications of their
loans.
Discussions we have had with our borrowers and tenants have addressed potential near-term defensive loan or
lease modifications, which have included repurposing of reserves, temporary deferrals of interest, or performance test or
covenant waivers on loans collateralized by assets directly impacted by the COVID-19 pandemic.
As discussed above, we have granted loan modifications to certain of our borrowers. Although we continue to
believe that the principal amounts of our assets are generally adequately protected by underlying collateral value, there is
a risk that we will not realize the entire principal value of certain investments.
Capital Market Risk
We are exposed to risks related to the equity capital markets and our related ability to raise capital through the
issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital
markets, and our related ability to finance our business through borrowings under repurchase obligations or other debt
instruments. As a REIT, we are required to distribute a significant portion of our taxable income annually, which
constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to
finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our
decisions on the amount, timing and terms of capital we raise.
The COVID-19 pandemic has also resulted in extreme volatility in a variety of global markets, including the
real estate-related debt markets. We may receive margin calls from our lenders as a result of the decline in the market
value of the loans or other assets pledged by us to our lenders under our repurchase agreements and warehouse credit
facilities, and if we fail to resolve such margin calls when due by payment of cash or delivery of additional collateral, the
lenders may exercise remedies including demanding payment by us of our aggregate outstanding financing obligations
and/or taking ownership of the loans or other assets securing the applicable obligations.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and
international economic and political considerations, as well as other factors beyond our control. We are subject to
interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match
the interest rate characteristics of our investments with the interest rate characteristics of any related financing
obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. In
instances where the interest rate characteristics of an investment and the related financing obligation are not matched, we
mitigate such interest rate risk through the utilization of interest rate derivatives of the same duration. The following
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table presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the
related interest rate derivatives as of December 31, 2020 and 2019 (dollars in thousands):
Aggregate Notional
Value of Interest
Hedged Instruments Rate Derivatives
Face Value of
Number of Interest
Rate Derivatives
Instrument hedged as of December 31, 2020
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
RMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HTM debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Instrument hedged as of December 31, 2019
Loans held-for-investment, residential . . . . . . . . . . . . . . . . . . . . $
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HTM debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
911,596 $
252,738
125,985
16,554
1,008,909
500,000
2,815,782 $
654,925 $
747,779
278,853
18,784
693,496
1,000,000
3,393,837 $
557,000
421,000
71,000
16,554
1,633,357
470,000
3,168,911
169,200
344,900
85,000
18,784
1,423,881
970,000
3,011,765
25
4
2
1
24
1
57
8
24
2
1
14
2
51
The following table summarizes the estimated annual change in net investment income for our variable rate
investments and our variable rate debt assuming increases or decreases in LIBOR or other applicable index rates and
adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share data):
Variable rate
investments and
indebtedness (1)
1.0%
Increase
Decrease
41,576 $ 16,421 $ (3,718) $ (3,845)
0.5%
Increase
Decrease
1.0%
0.5%
Income (Expense) Subject to Interest Rate Sensitivity
Investment income from variable rate investments . $ 11,039,970 $
Interest expense from variable rate debt, net of
interest rate derivatives . . . . . . . . . . . . . . . . . . . . . . .
Net investment income from variable rate
instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,672,852 $ (35,158) $ (20,500) $
Impact per diluted shares outstanding . . . . . . . . . . . .
(0.07) $
(7,367,118)
(0.12) $
(36,921)
(76,734)
$
7,351
5,373
3,633 $
0.01 $
1,528
0.01
(1) Includes the notional value of interest rate derivatives.
102
LIBOR Transition Risk
In July 2017, the United Kingdom’s Financial Conduct Authority (the authority that regulates LIBOR)
announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. However, for
U.S. dollar LIBOR, it now appears that the relevant date may be deferred to June 30, 2023. Regulators emphasized that,
despite any continued publication of U.S. dollar LIBOR through June 30, 2023, no new contracts using U.S. dollar
LIBOR should be entered into after December 31, 2021. Moreover, the LIBOR administrator has indicated its intention
to cease publication of non-U.S. dollar LIBOR after December 31, 2021. Although the foregoing may provide some
sense of timing, there is currently no certainty regarding the future utilization of LIBOR or of any particular replacement
rate (although the secured overnight financing (“SOFR”) rate has been proposed as an alternative to U.S. dollar LIBOR).
As indicated in the Interest Rate Risk section above, a substantial portion of our loans, investment securities, borrowings
and interest rate derivatives are indexed to LIBOR or similar reference rates. Market participants anticipate that
financial instruments tied to LIBOR will require transition to an alternative reference rate if LIBOR is no longer
available. Our LIBOR-based loan agreements and borrowing arrangements generally specify alternative reference rates
such as the prime rate, federal funds rate or SOFR. The potential effect of the discontinuation of LIBOR on our interest
income and expense cannot yet be determined and any changes to benchmark interest rates could increase our financing
costs and/or result in mismatches between the interest rates of our investments and the corresponding financings.
Prepayment Risk
Prepayment risk is the risk that principal will be repaid earlier than anticipated, causing the return on certain
investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid on such
assets are amortized against interest income. In general, an increase in prepayment rates accelerates the amortization of
purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on such assets are
accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of purchase discounts,
thereby increasing the interest income earned on the assets.
Extension Risk
We compute the projected weighted - average life of our assets based on assumptions regarding the rate at which
the borrowers will prepay the loans or extend. If prepayment rates decrease in a rising interest rate environment or
extension options are exercised, the life of the fixed - rate assets could extend beyond the term of the secured debt
agreements. This could have a negative impact on our results of operations. In some situations, we may be forced to sell
assets to maintain adequate liquidity, which could cause us to incur losses.
Fair Value Risk
The estimated fair value of our investments fluctuates primarily due to changes in interest rates and other
factors. Generally, in a rising interest rate environment, the estimated fair value of the fixed - rate investments would be
expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed - rate
investments would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our
assets recorded and/or disclosed may be adversely impacted. Our economic exposure is generally limited to our net
investment position as we seek to fund fixed rate investments with fixed rate financing or variable rate financing hedged
with interest rate swaps.
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.
103
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.
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 December 31, 2020 GBP closing rate of 1.3673, Euro (“EUR”) closing rate of 1.2217 and
AUD closing rate of 0.7694:
$
Carrying Value of
Net Investment
19,496
28,042
33,487
87,375
63,889
49,144
28,915
5,700
29,520
116,335
68,029
6,064
12,428
3,843
25,716
39,865
42,576
11,789
1,265
61,330
113,650
16,402
11,247
876,107
$
Local Currency
GBP
EUR
GBP
GBP
EUR
GBP
GBP
GBP
EUR
GBP
GBP
EUR
GBP
AUD
EUR
EUR
EUR
EUR
GBP
GBP
AUD
EUR
GBP
Number of
Foreign
Exchange
Contracts
Aggregate
Notional Value
of Hedges Applied
8 $
93
1
22
41
7
12
3
42
35
18
7
7
1
22
10
24
6
15
16
15
12
6
423 $
Expiration Range of Contracts
January 2021 – December 2023
January 2021 – January 2022
July 2023
January 2021 – April 2022
February 2021 – March 2023
February 2021 – May 2024
April 2021 – January 2024
April 2021 – October 2021
February 2021 – August 2022
January 2021 – January 2024
April 2021 – August 2021
February 2021 – July 2022
February 2021 – July 2022
August 2021
February 2021 – June 2023
28,251
24,863
38,879
89,375
68,503
936
38,912
6,942
31,904
156,952
70,982
7,264
14,862
4,357
32,145
61,882 February 2021 – November 2022
52,237 March 2021 – November 2025
15,471 February 2021 – November 2023
63,760
69,277 February 2021 – November 2021
122,748 November 2021 – June 2022
June 2022 – December 2022
18,693
13,513
March 2021 – April 2022
1,032,708
February 2021 – May 2024
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to, the impacts of the COVID-19 pandemic discussed above,
national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other
factors); local real estate conditions; changes or continued weakness in specific industry segments; construction quality,
age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in
property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the
underlying loans, which could also cause us to suffer losses.
Inflation Risk
Most of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors
influence our performance significantly more than inflation does. Changes in interest rates may correlate with inflation
rates and/or changes in inflation rates. Our financial statements are prepared in accordance with GAAP, and our
distributions are determined by our board of directors consistent with our obligation to distribute to our stockholders at
least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation.
104
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Schedules
Financial Statements
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
Consolidated Balance Sheets as of December 31, 2020 and 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . 110
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019 and 2018 . 111
Consolidated Statements of Equity for the Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . . . . . . 112
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 . . . . . . . . . . . 113
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Note 1 Business and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Note 2 Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
Note 3 Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
Note 4 Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
Note 5 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
Note 6 Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Note 7 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Note 8 Investment in Unconsolidated Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Note 9 Goodwill and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Note 10 Secured Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Note 11 Unsecured Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Note 12 Loan Securitization/Sale Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Note 13 Derivatives and Hedging Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Note 14 Offsetting Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Note 15 Variable Interest Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Note 16 Related - Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Note 17 Stockholders’ Equity and Non-Controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Note 18 Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Note 19 Accumulated Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Note 20 Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Note 21 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Note 22 Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
Note 23 Segment and Geographic Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Note 24 Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Note 25 Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . 186
Schedule IV—Mortgage Loans on Real Estate as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
All other schedules are omitted because they are not required or the required information is shown in the
financial statements or the notes thereto.
105
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Starwood Property Trust, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Starwood Property Trust, Inc. and subsidiaries (the
"Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive
income, equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes
and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 25, 2021, expressed an unqualified opinion on the
Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2020 the Company has changed its
method of accounting for expected credit losses due to the adoption of Accounting Standards Codification Topic 326,
Financial Instruments (cid:237) Credit Losses.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or
complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
106
Investment Securities - Valuation of Level III Residential Mortgage Backed Securities and Commercial Mortgage
Backed Securities — Refer to Notes 6 and 20 to the consolidated financial statements
Critical Audit Matter Description
The Company has commercial mortgage backed securities recorded in accordance with the fair value option and
residential mortgage backed securities, available-for-sale recorded at fair value that are not actively traded and whose
fair values are derived from proprietary pricing models that utilize unobservable inputs, market bids, other third-party
prices or quotes. Under accounting principles generally accepted in the United States of America, these financial
instruments are generally classified as Level 3 assets. Management’s judgments in selecting the price estimate that is
most reflective of fair value is inherently subjective.
Performing audit procedures to evaluate the appropriateness of these fair values requires a high degree of auditor
judgement and an increased extent of effort, including the need to involve our fair value specialists who possess
significant quantitative and modeling expertise.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s fair value estimates for Level 3 assets, included the following, among
others:
• We tested the effectiveness of controls, including those controls relating to investment security metrics and
characteristics, pricing sources, pricing policy and pricing selection.
• With the assistance of our fair value specialists, we developed independent fair value estimates for selected
investment securities and compared our estimates to management’s estimates.
• We evaluated the differences between our estimates of fair value and management’s estimates and considered
whether there were any indicators of management bias.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
February 25, 2021
We have served as the Company's auditor since 2009.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of
Starwood Property Trust, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Starwood Property Trust. Inc. and subsidiaries (the
“Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the
Company and our report dated February 25, 2021, expressed an unqualified opinion on those financial statements and
financial statement schedules and included an explanatory paragraph regarding the Company’s adoption of Accounting
Standards Codification Topic 326, Financial Instruments – Credit Losses.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management
Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ DELOITTE & TOUCHE LLP
Miami, Florida
February 25, 2021
108
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share data)
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-investment, net of credit loss allowances of $77,444 and $33,415
563,217 $
158,945
478,388
95,643
As of December 31,
2020
2019
11,087,073
1,052,835
10,586,074
884,150
($90,684 and $671,572 held at fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale ($932,295 and $764,622 held at fair value) . . . . . . . . . . . . . . . . . . . . . .
Investment securities, net of credit loss allowances of $5,675 and $0 ($198,053 and
$239,600 held at fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets ($13,202 and $16,917 held at fair value) . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest entity (“VIE”) assets, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
736,658
2,271,153
70,117
108,054
259,846
40,555
95,980
190,748
64,238,328
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,873,509 $
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Related-party payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financing agreements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Collateralized loan obligations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unsecured senior notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 22)
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and
206,845 $
39,170
137,959
41,324
10,146,190
930,554
1,732,520
62,776,371
76,010,933
810,238
2,266,440
85,700
84,329
259,846
28,943
64,087
211,323
62,187,175
78,042,336
212,006
40,925
137,427
8,740
8,906,048
928,060
1,928,622
60,743,494
72,905,322
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.01 per share, 500,000,000 shares authorized, 292,091,601 issued and
284,642,910 outstanding as of December 31, 2020 and 287,380,891 issued and
282,200,751 outstanding as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (7,448,691 shares and 5,180,140 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Starwood Property Trust, Inc. Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,921
5,209,739
(138,022)
43,993
(629,733)
4,488,898
373,678
4,862,576
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,873,509 $
2,874
5,132,532
(104,194)
50,932
(381,719)
4,700,425
436,589
5,137,014
78,042,336
Note: In addition to the VIE assets and liabilities which are separately presented, our consolidated balance sheets as of both
December 31, 2020 and 2019 includes assets of $1.1 billion and liabilities of $0.9 billion related to a consolidated collateralized loan
obligation (“CLO”), which is considered to be a VIE. The CLO’s assets can only be used to settle obligations of the CLO, and the
CLO’s liabilities do not have recourse to Starwood Property Trust, Inc. Refer to Note 15 for additional discussion of VIEs.
See notes to consolidated financial statements.
109
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Revenues:
For the Year Ended December 31,
2018
2019
2020
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 751,943 $ 724,013 $ 620,543
56,839
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,766
349,684
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,448
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,109,280
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,412
29,634
297,828
2,338
1,136,155
76,629
54,296
337,966
3,515
1,196,419
Costs and expenses:
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and investment pursuit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of rental operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss provision, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127,127
419,763
157,874
3,572
117,676
94,405
43,153
838
964,408
119,132
508,729
155,112
1,056
122,982
113,322
7,126
2,365
1,029,824
129,455
408,188
136,132
8,587
127,068
132,649
34,821
732
977,632
Other income (loss):
Change in net assets related to consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
165,892
Change in fair value of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(10,202)
Change in fair value of investment securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,345
Change in fair value of mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,522
Earnings (loss) from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,540
Gain on sale of investments and other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,044
(Loss) gain on derivative financial instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,603
Foreign currency gain (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,245)
Total other-than-temporary impairment (“OTTI”) . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Noncredit portion of OTTI recognized in other comprehensive income . . . . . . . . . . .
—
Net impairment losses recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,808)
Other income (loss), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(812)
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
294,879
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
426,527
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(15,330)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
411,197
(25,367)
Net income attributable to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Starwood Property Trust, Inc. . . . . . . . . . . . . . . . . . . $ 331,689 $ 509,664 $ 385,830
236,309
(3,640)
833
71,601
(101,354)
188,028
(6,310)
17,582
(267)
267
—
(19,270)
(207)
383,572
550,167
(13,232)
536,935
(27,271)
78,258
(3,715)
5,393
133,124
37,317
7,310
(82,178)
42,395
—
—
—
(3,654)
281
214,531
386,278
(20,197)
366,081
(34,392)
Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.16 $
1.16 $
1.81 $
1.79 $
1.44
1.42
See notes to consolidated financial statements.
110
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive loss (net change by component):
For the Year Ended December 31,
2019
536,935 $
2020
366,081 $
2018
411,197
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to non-controlling interests . .
Comprehensive income attributable to Starwood Property Trust, Inc. . . $
—
(6,939)
—
(6,939)
359,142
(34,392)
324,750 $
—
(2,519)
(5,209)
(7,728)
529,207
(27,271)
501,936 $
(25)
(4,374)
(6,865)
(11,264)
399,933
(25,367)
374,566
See notes to consolidated financial statements.
111
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2
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112
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Year Ended December 31,
2019
2018
2020
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
366,081 $
536,935 $
411,197
Amortization of deferred financing costs, premiums and discounts on secured
borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of discounts and deferred financing costs on unsecured senior notes . . . . . . .
Accretion of net discount on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of net deferred loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manager fees paid in stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency (gain) loss, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges on properties and related intangibles . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss provision, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Earnings) loss from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions of earnings from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Origination and purchase of loans held-for-sale, net of principal collections . . . . . . . . . . . . .
Proceeds from sale of loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Related-party payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and capitalized interest receivable, less purchased interest . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from principal collections on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and funding of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from principal collections on investment securities . . . . . . . . . . . . . . . . . . . . . . . .
Infrastructure lending business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of real estate and related businesses, net of cash transferred . . . . . . . . . .
Purchases and additions to properties and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of interest in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of capital from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for purchase or termination of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from termination of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,131
7,939
(12,818)
(42,199)
31,241
36,046
(5,393)
58,160
3,715
(133,124)
88,544
(42,395)
(7,310)
—
43,153
94,154
(37,317)
2,978
3,654
(2,074,678)
2,802,118
(1,755)
(175,287)
282
(372)
1,045,548
(3,133,196)
1,696,244
504,231
(22,408)
7,940
83,533
—
24,541
(25,164)
(3,133)
10,313
3,422
(74,801)
16,673
(911,805)
See notes to consolidated financial statements.
36,088
7,760
(11,791)
(35,387)
36,155
11,915
(833)
(67,798)
3,640
(71,601)
11,441
(17,582)
(188,028)
1,494
7,126
113,394
101,354
11,631
19,270
(3,543,503)
3,177,640
(3,118)
(114,156)
(29,787)
(5,458)
(13,199)
(5,473,399)
3,132,368
1,141,411
(98,258)
7,326
205,660
—
343,896
(30,865)
(18,055)
—
18,127
(42,835)
38,756
(775,868)
27,832
11,785
(15,253)
(38,099)
22,758
20,792
(10,345)
(17,408)
10,202
(40,522)
(30,828)
9,158
(59,044)
1,869
34,821
130,838
(10,540)
5,917
5,808
(2,105,232)
2,246,989
1,674
(62,261)
8,207
25,155
585,470
(4,428,891)
3,057,430
835,849
(492,400)
16,427
382,924
(2,158,553)
311,874
(54,772)
(3,100)
—
21,461
(29,581)
20,523
(2,520,809)
113
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Amounts in thousands)
For the Year Ended December 31,
2019
2020
2018
Cash Flows from Financing Activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Principal repayments on and repurchases of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from common stock issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of equity offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions from non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions of cash from consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in cash, cash equivalents and restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash, cash equivalents and restricted cash, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental disclosure of cash flow information:
7,100,563 $
(6,137,778)
(27,122)
1,098
(95)
(546,885)
11,775
(99,512)
(33,828)
187,494
(522,348)
79,921
13,283
147,026
574,031
1,105
722,162 $
10,167,339 $
(8,671,085)
(72,438)
767
(27)
(538,424)
183,520
(49,958)
—
184,540
(373,155)
45,642
876,721
87,654
487,865
(1,488)
574,031 $
9,412,715
(6,360,610)
(67,218)
608
(22)
(509,966)
13,407
(256,404)
(12,090)
102,474
(410,453)
92,283
2,004,724
69,385
418,273
207
487,865
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
379,949 $
11,369
481,483 $
11,284
337,605
10,900
Supplemental disclosure of non-cash investing and financing activities:
Dividends declared, but not yet paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Consolidation of VIEs (VIE asset/liability additions) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deconsolidation of VIEs (VIE asset/liability reductions) . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification of loans held-for-investment to loans held-for-sale . . . . . . . . . . . . . . . . . .
Reclassification of loans held-for-sale to loans held-for-investment . . . . . . . . . . . . . . . . .
Transfer of loans from VIE assets to loans held-for-sale upon redemption of a
138,075 $
136,715 $
4,665,636
32,270
749,995
104,327
10,368,817
377,071
—
340,948
consolidated RMBS trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired through control, foreclosure or conversion to equity interest . . . . . . . .
Loan principal collections temporarily held at master servicer . . . . . . . . . . . . . . . . . . . . . .
Redemption of Class A Units for common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contribution of Woodstar II Portfolio net assets from non-controlling interests . . . . . . . . .
Assets of Ireland real estate subsidiary sold, net of cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities of Ireland real estate subsidiary sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of 2019 Convertible Notes in shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement of loans transferred as secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities arising from obtaining right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired from consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assets acquired, net of cash and restricted cash . . . . . . . . . . . . . . . . . . . . . . .
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
176,614
71,488
34,601
8,538
1,576
—
—
—
—
—
—
—
—
—
53,278
44,426
21,070
2,877
440,966
360,049
75,525
74,692
9,626
8,613
—
—
133,237
9,885,200
1,649,485
—
—
—
—
—
—
416,626
—
—
271,243
—
—
27,737
2,167,652
9,099
See notes to consolidated financial statements.
114
Starwood Property Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2020
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 mortgage loans and other real estate investments
in both the United States (“U.S.”) and Europe. As market conditions change over time, we may adjust our strategy to
take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.
We have four reportable business segments as of December 31, 2020 and we refer to the investments within
these segments as our target assets:
• Real estate commercial and residential lending (the “Commercial and Residential Lending Segment”)—
engages primarily in originating, acquiring, financing and managing commercial first mortgages, non-
agency residential mortgages (“residential loans”), subordinated mortgages, mezzanine loans, preferred
equity, commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities
(“RMBS”) and other real estate and real estate-related debt investments in both the U.S. and Europe
(including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on
residential property and consist of non-agency residential mortgage loans that are not guaranteed by any
U.S. Government agency or federally chartered corporation.
•
Infrastructure lending (the “Infrastructure Lending Segment”)—engages primarily in originating, acquiring,
financing and managing infrastructure debt investments.
• Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity
interests in stabilized commercial real estate properties, including multifamily properties and commercial
properties subject to net leases, that are held for investment.
• Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing
business in the U.S. that manages and works out problem assets, (ii) an investment business that selectively
acquires and manages unrated, investment grade and non-investment grade rated CMBS, including
subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business
which originates conduit loans for the primary purpose of selling these loans into securitization transactions
and (iv) an investment business that selectively acquires commercial real estate assets, including properties
acquired from CMBS trusts.
Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).
We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the
Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal
corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of
our taxable income to our stockholders by prescribed dates and comply with various other requirements.
We are organized as a holding company and conduct our business primarily through our various wholly - owned
subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms
of a management agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer.
Our Manager is an affiliate of Starwood Capital Group, a privately - held private equity firm founded by Mr. Sternlicht.
115
2. Summary of Significant Accounting Policies
Balance Sheet Presentation of Securitization Variable Interest Entities
We operate investment businesses that acquire unrated, investment grade and non-investment grade rated
CMBS and RMBS. These securities represent interests in securitization structures (commonly referred to as special
purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the
underlying collateral and distribute those payments to the certificate holders. Under accounting principles generally
accepted in the United States of America (“GAAP”), SPEs typically qualify as VIEs. These are entities that, by design,
either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial
support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating
to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not
have the right to receive the residual returns of the entity.
Because we often serve as the special servicer or servicing administrator of the trusts in which we invest, or we
have the ability to remove and replace the special servicer without cause, consolidation of these structures is required
pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross
assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used
to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general
credit of any other consolidated entities, nor to us as the consolidator of these VIEs.
The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon
consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those
securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as
collateral administrator of the consolidated VIEs are also eliminated. Finally, a portion of the identified servicing
intangible associated with the eliminated fee streams is eliminated in consolidation.
Refer to the segment data in Note 23 for a presentation of our business segments without consolidation of these
VIEs.
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements include our accounts and those of our consolidated
subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation.
Entities not deemed to be VIEs are consolidated if we own a majority of the voting securities or interests or hold
the general partnership interest, except in those instances in which the minority voting interest owner or limited partner
can remove us as general partner without cause, dissolve the partnership without cause or effectively participate through
substantive participative rights. Substantive participative rights include the ability to select, terminate and set
compensation of the investee’s management, if applicable, and the ability to participate in capital and operating decisions
of the investee, including budgets, in the ordinary course of business.
We invest in entities with varying structures, many of which do not have voting securities or interests, such as
general partnerships, limited partnerships, and limited liability companies. In many of these structures, control of the
entity rests with the general partners or managing members, while other members hold passive interests. The general
partner or managing member may hold anywhere from a relatively small percentage of the total financial interests to a
majority of the financial interests. For entities not deemed to be VIEs, where we serve as the sole general partner or
managing member, we are considered to have the controlling financial interest and therefore the entity is consolidated,
regardless of our financial interest percentage, unless there are other limited partners or investing members that can
remove us as general partner without cause, dissolve the partnership without cause or effectively participate through
substantive participative rights. In those circumstances where we, as majority controlling interest owner, can be removed
without cause or cannot cause the entity to take actions that are significant in the ordinary course of business, because
such actions could be vetoed by the minority controlling interest owner, we do not consolidate the entity.
116
When we consolidate entities other than securitization VIEs, the third party ownership interests are reflected as
non-controlling interests in consolidated subsidiaries, a separate component of equity, in our consolidated balance sheet.
When we consolidate securitization VIEs, the third party ownership interests are reflected as VIE liabilities in our
consolidated balance sheet because the beneficial interests payable to these third parties are legally issued in the form of
debt. Our presentation of net income attributes earnings to controlling and non-controlling interests.
Variable Interest Entities
In addition to the securitization VIEs, we have financed a pool of our loans through a collateralized loan
obligation (“CLO”) which is considered a VIE. We also hold interests in certain other entities which are considered VIEs
as the limited partners of those entities with equity at risk do not collectively possess (i) the right to remove the general
partner or dissolve the partnership without cause or (ii) the right to participate in significant decisions made by the
partnership.
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 unrated and non - investment grade rated securities issued by
securitization trusts. In certain cases, we may contract to provide special servicing activities for these 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
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structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation.
Further, a portion of the identified servicing intangible asset associated with the servicing fee streams, and the
corresponding 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 consolidated statements of operations. The residual difference shown on our
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 consolidated balance sheets. The liabilities of our consolidated securitization VIEs consist solely of obligations to
the bondholders of the related 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 non-performance of the loan. Because the loan is
already at fair value, the carrying value of an REO asset is also initially at fair value. Furthermore, when we consolidate
a 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 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 trust.
REO assets generally represent a very small percentage of the overall asset pool of a trust. In new issue trusts
there are no REO assets. We estimate that REO assets constitute approximately 1% of our consolidated securitization
VIE assets, with the remaining 99% representing loans. However, it is important to note that the fair value of our
securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under Accounting
Standards Update (“ASU”) 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.
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Fair Value Option
The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to
make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible
financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are
reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and
must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value
pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments
using another accounting method.
We have elected the fair value option for certain eligible financial assets and liabilities of our consolidated
securitization VIEs, residential loans held-for-investment, loans held-for-sale originated or acquired for future
securitization and purchased CMBS issued by VIEs we could consolidate in the future. 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 residential
loans held-for-investment were made in order to maintain consistency across all our residential loans. The fair value
elections for mortgage loans held-for-sale were made due to the expected short-term holding period of these instruments.
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 VIEs, we maximize the use of observable inputs over unobservable inputs.
Refer to Note 20 for further discussion regarding our fair value measurements.
Business Combinations
Under ASC 805, Business Combinations, the acquirer in a business combination must recognize, with certain
exceptions, the fair values of assets acquired, liabilities assumed, and non-controlling interests when the acquisition
constitutes a change in control of the acquired entity. As goodwill is calculated as a residual, all goodwill of the acquired
business, not just the acquirer’s share, is recognized under this “full goodwill” approach. During the measurement
period, a period which shall not exceed one year, we prospectively adjust the provisional amounts recognized to reflect
new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have
affected the measurement of the amounts recognized.
We apply the asset acquisition provisions of ASC 805 in accounting for acquisitions of real estate with in-place
leases where substantially all of the fair value of the assets acquired is concentrated in either a single identifiable asset or
group of similar identifiable assets. This results in the acquired properties being recognized initially at their purchase
price inclusive of acquisition costs, which are capitalized. All other acquisitions of real estate with in-place leases are
accounted for in accordance with the business combination provisions of ASC 805. We also apply the asset acquisition
provisions of ASC 805 for acquired real estate assets where a lease is entered into concurrently with the acquisition of
the asset, such as in sale leaseback transactions.
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Cash and Cash Equivalents
Cash and cash equivalents include cash in banks and short - term investments. Short - term investments are
comprised of highly liquid instruments with original maturities of three months or less. The Company maintains its cash
and cash equivalents in multiple financial institutions and at times these balances exceed federally insurable limits.
Restricted Cash
Restricted cash includes cash and cash equivalents that are legally or contractually restricted as to withdrawal or
usage and primarily includes (i) cash collateral associated with derivative financial instruments, (ii) loan payments
received by our Infrastructure Lending Segment which are restricted by our lender and periodically applied, in part, to
the outstanding balance of the Infrastructure Lending debt facility and (iii) funds held on behalf of borrowers and
tenants.
Loans Held - for - Investment
Loans that are held for investment (“HFI”) are carried at cost, net of unamortized acquisition premiums or
discounts, loan fees and origination costs, as applicable, and net of credit loss allowances as discussed below, unless we
have elected to apply the fair value option at purchase.
Loans Held - For - Sale
Our loans that we intend to sell or liquidate in the short - term are classified as held - for - sale and are carried at the
lower of amortized cost or fair value, unless we have elected to apply the fair value option at origination or purchase. We
periodically enter into derivative financial instruments to hedge unpredictable changes in fair value of loans held-for-
sale, including changes resulting from both interest rates and credit quality. Because these derivatives are not designated,
changes in their fair value are recorded in earnings. In order to best reflect the results of the hedged loan portfolio in
earnings, we have elected the fair value option for these loans. As a result, changes in the fair value of the loans are also
recorded in earnings.
Investment Securities
We designate our debt investment securities as held-to-maturity (“HTM”), available-for-sale (“AFS”), or
trading depending on our investment strategy and ability to hold such securities to maturity. HTM debt securities where
we have not elected to apply the fair value option are stated at cost plus any premiums or discounts, which are amortized
or accreted through the consolidated statements of operations using the effective interest method. Debt securities we
(i) do not hold for the purpose of selling in the near-term, or (ii) may dispose of prior to maturity, are classified as AFS
and are carried at fair value in the accompanying financial statements. Unrealized gains or losses on AFS debt securities
where we have not elected the fair value option are reported as a component of accumulated other comprehensive
income (“AOCI”) in stockholders’ equity. Our HTM and AFS debt securities are also subject to credit loss allowances as
discussed below.
Our only equity investment security is carried at fair value, with unrealized holding gains and losses recorded in
earnings.
Credit Losses
Loans and Debt Securities Measured at Amortized Cost
ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC
326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain
financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under
GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to
only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss”
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methodology. The CECL model applies to our HFI loans and HTM debt securities which are carried at amortized cost,
including future funding commitments and accrued interest receivable related to those loans and securities. However, as
permitted by ASC 326, we have elected not to measure an allowance for credit losses on accrued interest receivable
(which is classified separately on our consolidated balance sheet), but rather write off in a timely manner by reversing
interest income and/or cease accruing interest that would likely be uncollectible. Our adoption of the CECL model
resulted in a $32.3 million increase to our total allowance for credit losses, which was recognized as a cumulative-effect
adjustment to accumulated deficit as of January 1, 2020.
As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed
to third party database services to provide us with historical industry losses for both commercial real estate and
infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities
on a collective basis within our commercial real estate and infrastructure portfolios. See Note 5 for further discussion of
our methodologies.
We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly.
Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to
the contractual terms of the loan or security. If a loan or security is considered to be credit deteriorated, we depart from
the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized
cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual
effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.
Available-for-Sale Debt Securities
Separate provisions of ASC 326 apply to our AFS debt securities, which are carried at fair value with unrealized
gains and losses reported as a component of AOCI. We are required to establish an initial credit loss allowance for those
securities that are purchased with credit deterioration (“PCD”) by grossing up the amortized cost basis of each security
and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash
flows, both on a present value basis. As of the January 1, 2020 effective date, no such credit loss allowance gross-up
was required on our AFS debt securities with PCD due to their individual unrealized gain positions as of that date.
Subsequently, cumulative adverse changes in expected cash flows on our AFS debt securities are recognized
currently as an increase to the allowance for credit losses. However, the allowance is limited to the amount by which the
AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized
as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as
a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash
flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is
accounted for as a prospective yield adjustment.
Properties Held-For-Investment
Properties, net, as reported on our consolidated balance sheets, consist of commercial real estate properties held-
for-investment and are recorded at cost, less accumulated depreciation and impairments, if any. Properties consist
primarily of land, buildings and improvements. Land is not depreciated, and buildings and improvements are
depreciated on a straight-line basis over their estimated useful lives. Ordinary repairs and maintenance are expensed as
incurred; major replacements and betterments are capitalized and depreciated on a straight-line basis over their estimated
useful lives. We review properties for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Recoverability is determined by comparing the carrying amount of
the property to the undiscounted future net cash flows it is expected to generate. If such carrying amount exceeds the
expected undiscounted future net cash flows, we adjust the carrying amount of the property to its estimated fair value.
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Properties Held-For-Sale
Properties and any associated intangible assets are presented within properties held-for-sale on our consolidated
balance sheet when the sale of the property is considered probable, at which time we cease depreciation and amortization
of the property and the associated intangibles. Held-for-sale properties are reported at the lower of their carrying value
or fair value less costs to sell. There were no properties held-for-sale at December 31, 2020 or 2019.
Servicing Rights Intangibles
Our identifiable intangible assets include domestic special servicing rights for which we have elected to apply
the fair value measurement method, which is necessary to conform to our election of the fair value option for measuring
the assets and liabilities of the VIEs consolidated pursuant to ASC 810.
Lease Intangibles
In connection with our acquisition of properties, we recognize intangible lease assets and liabilities associated
with certain noncancelable operating leases of the acquired properties. These intangible lease assets and liabilities
include in-place lease intangible assets, favorable lease intangible assets and unfavorable lease liabilities. In-place lease
intangible assets reflect the acquired benefit of purchasing properties with in-place leases and are measured based on
estimates of direct costs associated with leasing the property and lost rental income during projected lease-up and free
rent periods, both of which are avoided due to the presence of in-place leases at the acquisition date. Favorable and
unfavorable lease intangible assets and liabilities reflect the terms of in-place tenant leases being either favorable or
unfavorable relative to market terms at the acquisition date. The estimated fair values of our favorable and unfavorable
lease assets and liabilities at the respective acquisition dates represent the discounted cash flow differential between the
contractual cash flows of such leases and the estimated cash flows that comparable leases at market terms would
generate. Our intangible lease assets and liabilities are recognized within intangible assets and other liabilities,
respectively, in our consolidated balance sheets. Our in-place lease intangible assets are amortized to amortization
expense while our favorable and unfavorable lease intangible assets and liabilities where we are the lessor are amortized
to rental income. Both our favorable and unfavorable lease intangible assets and liabilities are amortized over the
remaining noncancelable term of the respective leases on a straight-line basis.
Leases
On January 1, 2019, ASC 842, Leases, became effective for the Company. ASC 842 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 affected by this ASC. We elected to apply the provisions of
ASC 842 as of January 1, 2019 and not to retrospectively adjust prior periods presented. Such application did not result
in any cumulative-effect adjustment as of January 1, 2019. We elected the “package of practical expedients” for
transition purposes, which permits us not to reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs for leases that commenced prior to January 1, 2019. We also
elected not to apply the recognition provisions of ASC 842 to short-term leases, which have original lease terms of 12
months or less. As a lessor, we elected not to separate nonlease components, such as reimbursements from tenants for
common area maintenance (“CAM”), from lease components for all classes of underlying assets, and continue to
recognize such nonlease components ratably in rental income. We also elected to continue to exclude from rental
income all sales, use and other similar taxes collected from lessees. As required by ASC 842, we no longer record as
revenues and expenses lessor costs (such as property taxes) paid directly by the lessees. The application of ASC 842 has
had no material effect on our consolidated financial statements, as all of our leases, as both lessor and lessee, are
currently classified as operating leases, which are subject to essentially the same straight-line revenue and expense
recognition as in the past. As a lessee, our only significant long-term lease as of January 1, 2019 resulted in the
recognition of a $12.0 million lease liability and corresponding right-of-use asset, which are classified within “Accounts
payable, accrued expenses and other liabilities” and “Other assets”, respectively, in our consolidated balance sheets as of
December 31, 2020 and 2019.
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Investment in Unconsolidated Entities
We own non - controlling equity interests in various privately - held partnerships and limited liability companies.
Unless we elect the fair value option under ASC 825, we use the fair value practicability election described below to
account for investments in which our interest is so minor that we have virtually no influence over the underlying
investees. We use the equity method to account for all other non - controlling interests in partnerships and limited liability
companies. Equity method investments are initially recorded at cost and subsequently adjusted for our share of income or
loss, as well as contributions made or distributions received.
Our other equity investments set forth in Note 8 do not have readily determinable fair values. Therefore, we
have elected the fair value practicability exception under ASC 321, Equity Securities, whereby we measure those
investments within its scope at cost, less any impairment, plus or minus observable price changes from orderly
transactions of identical or similar investments of the same issuer. Our investment in Federal Home Loan Bank
(“FHLB”) stock, which is not within the scope of ASC 321, is carried at cost less any impairment.
We review our equity method and other investments not subject to the fair value practicability election for
impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For
our investments under the fair value practicability election, we perform a qualitative assessment to identify impairment at
the end of each reporting period. An impairment loss is measured based on the excess of the carrying amount of an
investment over its estimated fair value. Impairment analyses are based on current plans, intended holding periods,
estimated fair values of underlying assets and available information at the time the analyses are prepared.
Goodwill
Goodwill is not amortized, but rather tested for impairment annually or more frequently if events or changes in
circumstances indicate potential impairment. Goodwill at December 31, 2020 represents the excess of the consideration
paid over the fair value of net assets acquired in connection with the acquisitions of LNR Property LLC (“LNR”) in
April 2013 and the Infrastructure Lending Segment in September 2018 and October 2018.
In testing goodwill for impairment, we follow ASC 350, Intangibles—Goodwill and Other, which permits a
qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying
value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of
a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the
reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the
reporting unit is less than its carrying value including goodwill, or we choose not to perform the qualitative assessment,
then we compare the fair value of that reporting unit with its carrying value, including goodwill. ASU 2017-04, Goodwill
and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, became effective for the Company on January 1,
2020. This ASU specifies that if the carrying value of a reporting unit exceeds its fair value, goodwill is considered
impaired with the impairment loss 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.
Derivative Instruments and Hedging Activities
We record all derivatives on our consolidated balance sheets at fair value. The accounting for changes in the fair
value of derivatives depends on whether we have elected to designate a derivative in a hedging relationship and have
satisfied the criteria necessary to apply hedge accounting under GAAP. Derivatives designated and qualifying as a hedge
of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such
as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to
variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging
instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the
hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We
regularly enter into derivative contracts that are intended to economically hedge certain of our risks, even though the
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transactions may not qualify for, or we may not elect to pursue, hedge accounting. In such cases, changes in the fair
value of the derivatives are recorded in earnings.
Generally, our derivatives are subject to master netting arrangements, though we elect to present all derivative
assets and liabilities on a gross basis within our consolidated balance sheets.
Convertible Senior Notes
ASC 470, Debt, requires the liability and equity components of convertible debt instruments that may be settled
in cash upon conversion to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt
borrowing rate. ASC 470-20 requires that the initial proceeds from the sale of these notes be allocated between a liability
component and an equity component in a manner that reflects interest expense at the interest rate of similar
nonconvertible debt that could have been issued by the Company at such time. The equity components of our convertible
senior notes (the “Convertible Notes”) have been reflected within additional paid-in capital in our consolidated balance
sheets. The resulting debt discount is being amortized over the period during which the convertible senior notes are
expected to be outstanding (the maturity date) as additional non-cash interest expense.
Upon settlement of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement
consideration, inclusive of transaction costs, amongst the liability and equity components of the instrument based on the
fair value of the liability component immediately prior to repurchase. The difference between the settlement
consideration allocated to the liability component and the net carrying value of the liability component, including
unamortized debt issuance costs, is recognized as gain (loss) on extinguishment of debt in our consolidated statements of
operations. The remaining settlement consideration allocated to the equity component is recognized as a reduction of
additional paid-in capital in our consolidated balance sheets.
Revenue Recognition
Interest Income
Interest income on performing loans and financial instruments is accrued based on the outstanding principal
amount and contractual terms of the instrument. For loans where we do not elect the fair value option, origination fees
and direct loan origination costs are also recognized in interest income over the loan term as a yield adjustment using the
effective interest method. When we elect the fair value option, origination fees and direct loan costs are recorded directly
in income and are not deferred. Discounts or premiums associated with the purchase of non-performing loans and
investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest
method, based on expected cash flows through the expected maturity date of the investment. On at least a quarterly basis,
we review and, if appropriate, make adjustments to our cash flow projections.
We cease accruing interest on non-performing loans at the earlier of (i) the loan becoming significantly past due
or (ii) management concluding that a full recovery of all interest and principal is doubtful. Interest income on non-
accrual loans in which management expects a full recovery of the loan’s outstanding principal balance is only recognized
when received in cash. If a full recovery of principal is doubtful, the cost recovery method is applied whereby any cash
received is applied to the outstanding principal balance of the loan. A non-accrual loan is returned to accrual status at
such time as the loan becomes contractually current and management believes all future principal and interest will be
received according to the contractual loan terms.
For loans acquired with deteriorated credit quality, interest income is only recognized to the extent that our
estimate of undiscounted expected principal and interest exceeds our investment in the loan. Such excess, if any, is
recognized as interest income on a level-yield basis over the life of the loan.
Upon the sale of loans or securities which are not accounted for pursuant to the fair value option, the excess (or
deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain (loss).
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Servicing Fees
We typically seek to be the special servicer on CMBS transactions in which we invest. When we are appointed
to serve in this capacity, we earn special servicing fees from the related activities performed, which consist primarily of
overseeing the workout of under - performing and non - performing loans underlying the CMBS transactions. These fees
are recognized in income in the period in which the services are performed and the revenue recognition criteria have
been met.
Rental Income
Rental income is recognized when earned from tenants. For leases that provide rent concessions or fixed
escalations over the lease term, rental income is recognized on a straight-line basis over the noncancelable term of the
lease. In net lease arrangements, costs reimbursable from tenants are recognized in rental income in the period in which
the related expenses are incurred as we are generally the primary obligor with respect to purchasing goods and services
for property operations. In instances where the tenant is responsible for property maintenance and repairs and contracts
and settles such costs directly with third party service providers, we do not reflect those expenses in our consolidated
statement of operations as the tenant is the primary obligor.
Securitizations, Sales and Financing Arrangements
We periodically sell our financial assets, such as commercial mortgage loans, residential loans, CMBS, RMBS
and other assets. In connection with these transactions, we may retain or acquire senior or subordinated interests in the
related assets. Gains and losses on such transactions are recognized in accordance with ASC 860, Transfers and
Servicing, which is based on a financial components approach that focuses on control. Under this approach, after a
transfer of financial assets that meets the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or
exchange the transferred assets without constraint, and transferred control—an entity recognizes the financial assets it
retains and any liabilities it has incurred, derecognizes the financial assets it has sold, and derecognizes liabilities when
extinguished. We determine the gain or loss on sale of the assets by allocating the carrying value of the sold asset
between the sold asset and the interests retained based on their relative fair values, as applicable. The gain or loss on sale
is the difference between the cash proceeds from the sale and the amount allocated to the sold asset. If the sold asset is
being accounted for pursuant to the fair value option, there is no gain or loss.
Deferred Financing Costs
Costs incurred in connection with debt issuance are capitalized and amortized to interest expense over the terms
of the respective debt agreements. Such costs are presented as a direct deduction from the carrying value of the related
debt liability.
Acquisition and Investment Pursuit Costs
Costs incurred in connection with acquisitions of investments, loans and businesses, as well as in pursuing
unsuccessful acquisitions and investments, are recorded within acquisition and investment pursuit costs in our
consolidated statements of operations when incurred. Costs incurred in connection with acquisitions of real estate not
accounted for as business combinations are capitalized within the purchase price. These costs reflect services performed
by third parties and principally include due diligence and legal services.
Share - Based Payments
The fair value of the restricted stock (“RSAs”) or restricted stock units (“RSUs”) granted is recorded as expense
on a straight - line basis over the vesting period for the award, with an offsetting increase in stockholders’ equity. For
grants to employees and directors, the fair value is determined based upon the stock price on the grant date.
Effective July 1, 2018, we early adopted ASU 2018-07, Compensation – Stock Compensation (Topic 718) –
Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for nonemployee share-
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based compensation with the existing accounting model for employee share based compensation. Prior to our adoption
of ASU 2018-07, nonemployee share awards were recognized as an expense on a straight-line basis over the vesting
period of the award with the fair value of the award remeasured at each vesting date. After our adoption of ASU
2018-07, nonemployee share awards continue to be recorded as expense on a straight-line basis over their vesting period,
however, the fair value of the award is only determined on the grant date and not remeasured at subsequent vesting dates,
consistent with the accounting for employee share awards. For non-employee awards granted prior to our July 1, 2018
adoption date, the awards were remeasured at fair value as of our July 1, 2018 adoption date with no subsequent
remeasurement.
Foreign Currency Translation
Our assets and liabilities denominated in foreign currencies are translated into U.S. dollars using foreign
currency exchange rates at the end of the reporting period. Income and expenses are translated at the average exchange
rates for each reporting period. The effects of translating the assets, liabilities and income of our foreign investments held
by entities with a U.S. dollar functional currency are included in foreign currency gain (loss) in the consolidated
statements of operations or other comprehensive income (“OCI”) for debt securities available-for-sale for which the fair
value option has not been elected. The effects of translating the assets, liabilities and income of our foreign investments
held by entities with functional currencies other than the U.S. dollar are included in OCI. Realized foreign currency gains
and losses and changes in the value of foreign currency denominated monetary assets and liabilities are included in the
determination of net income and are reported as foreign currency gain (loss) in our consolidated statements of operations.
Income Taxes
The Company has elected to be taxed as a REIT under the Code. The Company is subject to federal income
taxation at corporate rates on its REIT taxable income, however, the Company is allowed a deduction for the amount of
dividends paid to its stockholders in arriving at its REIT taxable income. As a result, distributed net income of the
Company is subjected to taxation at the stockholder level only. The Company intends to continue operating in a manner
that will permit it to maintain its qualification as a REIT for tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company evaluates
the realizability of its deferred tax assets and recognizes a valuation allowance if, based on the available evidence, both
positive and negative, it is more likely than not that some portion or all of its deferred tax assets will not be realized.
When evaluating the realizability of its deferred tax assets, the Company considers, among other matters, estimates of
expected future taxable income, nature of current and cumulative losses, existing and projected book/tax differences, tax
planning strategies available, and the general and industry specific economic outlook. This realizability analysis is
inherently subjective, as it requires the Company to forecast its business and general economic environment in future
periods.
We recognize tax positions in the financial statements only when it is more likely than not that, based on the
technical merits of the tax position, the position will be sustained upon examination by the relevant taxing authority. A
tax position is measured at the largest amount of benefit that will more likely than not be realized upon settlement. If, as
a result of new events or information, a recognized tax position no longer is considered more likely than not to be
sustained upon examination, a liability is established for the unrecognized benefit with a corresponding charge to income
tax expense in our consolidated statement of operations. We report interest and penalties, if any, related to income tax
matters as a component of income tax expense.
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 RSAs and RSUs, (ii) shares contingently
issuable to our Manager, (iii) the conversion options associated with our outstanding Convertible Notes (see Notes 11
126
and 18), and (iv) non-controlling interests that are redeemable with our common stock (see Note 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. In addition, the non-controlling interests that are redeemable with our common stock
are considered participating securities because they earn a preferred return indexed to the dividend rate on our common
stock (see Note 17). 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 years ended December 31, 2020,
2019 and 2018, the two-class method resulted in the most dilutive EPS calculation.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash
investments, CMBS, RMBS, loan investments and interest receivable. We may place cash investments in excess of
insured amounts with high quality financial institutions. We perform an ongoing analysis of credit risk concentrations in
our investment portfolio by evaluating exposure to various counterparties, markets, underlying property types, contract
terms, tenant mix and other credit metrics.
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. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive
on our investments, which has a significant impact on the amount of income 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.
The outbreak of COVID-19 beginning in the first quarter of 2020 has had, and is expected to continue to have,
an adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid
development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on
economic and market conditions. We believe the estimates and assumptions underlying our consolidated financial
statements are reasonable and supportable based on the information available as of December 31, 2020. However,
uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in
particular, makes any estimates and assumptions as of December 31, 2020 inherently less certain than they would be
absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.
Recent Accounting Developments
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the
Effects of Reference Rate Reform on Financial Reporting, and on January 11, 2021, issued ASU 2021-01, Reference
Rate Reform (Topic 848) – Scope, both of which provide optional expedients and exceptions for applying GAAP to
contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be
discontinued because of reference rate reform. These ASUs are effective through December 31, 2022. The Company has
not adopted any of the optional expedients or exceptions through December 31, 2020, but will continue to evaluate the
possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.
On August 5, 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic
470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which removes certain
separation models for convertible debt instruments and convertible preferred stock that require the separation into a debt
component and an equity or derivative component. Consequently, a convertible debt instrument will be accounted for as
a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity
instrument measured at its historical cost, as long as no other features require bifurcation and recognition as derivatives
127
and the convertible instruments are not issued with substantial premiums accounted for as paid-in capital. By removing
those separation models, the interest rate of convertible debt instruments typically will be closer to the coupon interest
rate. ASU 2020-06 also revises the derivative scope exception for contracts in an entity’s own equity and improves the
consistency of EPS calculations. This ASU is effective for larger public business entities’ annual periods, and interim
periods therein, beginning after December 15, 2021. Early application is permitted for fiscal years beginning after
December 15, 2020. We expect to early adopt this ASU effective January 1, 2021 through the modified retrospective
method of transition, resulting in a cumulative adjustment to our beginning stockholders’ equity components as of that
date related to our outstanding Convertible Notes. We do not expect the application of this ASU, including the
cumulative adjustment upon adoption, to materially impact our consolidated financial statements.
3. Acquisitions and Divestitures
Investing and Servicing Segment Property Portfolio
During the year ended December 31, 2019, our Investing and Servicing Segment acquired $8.6 million in net
assets of a commercial real estate property from a CMBS trust for a gross purchase price of $8.8 million. This property,
aggregated with the controlling interests in 14 remaining commercial real estate properties acquired from CMBS trusts
prior to December 31, 2018 for an aggregate acquisition price of $207.4 million, comprise the Investing and Servicing
Segment Property Portfolio (the “REIS Equity Portfolio”). During the year ended December 31, 2018, our Investing and
Servicing Segment acquired $52.7 million in net assets of three commercial real estate properties from CMBS trusts for a
gross purchase price of $53.1 million. During the year ended December 31, 2020, we had no acquisitions of commercial
real estate property. 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 consolidated statements of cash
flows.
During the year ended December 31, 2020, we sold a property within the REIS Equity Portfolio for $24.1
million. In connection with this sale, we recognized a gain of $7.4 million within gain on sale of investments and other
assets in our consolidated statement of operations. During the year ended December 31, 2019, we sold four properties
within the Investing and Servicing Segment for $145.9 million. In connection with these sales, we recognized a total gain
of $59.7 million within gain on sale of investments and other assets in our consolidated statement of operations, of which
$5.3 million was attributable to non-controlling interests. During the year ended December 31, 2018, we sold nine
properties within the Investing and Servicing Segment for $77.9 million. In connection with these sales, we recognized a
total gain of $26.6 million within gain on sale of investments and other assets in our consolidated statement of
operations, of which $5.1 million was attributable to non-controlling interests. One of these properties was acquired by a
third party which already held a $0.3 million non-controlling interest in the property.
Ireland Portfolio Sale
On December 23, 2019, we sold the U.S. entity which held the net assets related to our Ireland Portfolio, which
was comprised of 11 office properties and one multifamily property all located in Dublin Ireland. The properties within
the entity were sold for a gross purchase price of €530.0 million. After certain adjustments, including a €20.7 million tax
withholding which was treated as a reduction of purchase price, the net purchase price was €507.6 million, plus
estimated net working capital. In connection with the transaction, the buyer assumed our existing third party debt
totaling €316.3 million. Our basis in these assets was €394.7 million, net of €67.5 million of accumulated depreciation.
The resulting gain, after selling costs, was €108.0 (or $119.7) million. This amount was included within gain on sale of
investments and other assets in our consolidated statement of operations for the year ended December 31, 2019.
Upon receipt of the net proceeds from the sale, we unwound all of our foreign currency hedges related to this
portfolio, which had a fair value of $16.6 million at the unwind date.
There were no properties sold within the Ireland Portfolio during the years ended December 31, 2020 and 2018.
128
Infrastructure Lending Segment
On September 19, 2018, we acquired the project finance origination, underwriting and capital markets business
of GE Capital Global Holdings, LLC (“GE Capital”) for approximately $2.0 billion (the “Infrastructure Lending
Segment”) and on October 15, 2018, we acquired two additional senior secured project finance loans from GE Capital
for $147.1 million. In total, the business included $2.1 billion of funded senior secured project finance loans and
investment securities and $466.3 million of unfunded lending commitments (the “Infrastructure Lending Portfolio”)
which are secured primarily by natural gas and renewable power facilities. We utilized $1.7 billion in new financing in
order to fund the acquisition.
The Company hired a team of professionals from GE Capital’s project finance division in connection with the
acquisition to manage and expand the Infrastructure Lending Portfolio. Goodwill of $119.4 million was recognized in
connection with the Infrastructure Lending Segment acquisition as the consideration paid exceeded the fair value of the
net assets acquired.
We applied the provisions of ASC 805, Business Combinations, in accounting for our acquisition of the
Infrastructure Lending Segment. In doing so, we recorded all identifiable assets acquired and liabilities assumed at fair
value as of the respective acquisition dates.
Woodstar II Portfolio
During the year ended December 31, 2018, we acquired the final 19 properties of the 27 affordable housing
communities comprising our “Woodstar II Portfolio”. The Woodstar II Portfolio in its entirety is comprised of 6,109
units concentrated primarily in Central and South Florida and is 100% occupied.
The 19 affordable housing communities acquired during the year ended December 31, 2018 consist of 4,369
units and were acquired for $438.1 million, including contingent consideration of $29.2 million (the “2018 Closing”).
The properties acquired in the 2018 Closing were recognized initially at the purchase price of $408.9 million plus
capitalized acquisition costs of $4.1 million. Government sponsored mortgage debt of $27.0 million with weighted
average fixed annual interest rates of 3.06% and remaining weighted average terms of 27.5 years was assumed at
closing. We financed a portion of the 2018 Closing utilizing new 10-year mortgage debt totaling $300.9 million with
weighted average fixed annual interest rates of 3.82%.
In December 2017, we acquired eight of the affordable housing communities (the “2017 Closing”), which
include 1,740 units, for $156.2 million, including contingent consideration of $10.8 million. We financed the 2017
Closing utilizing 10-year mortgage debt totaling $116.7 million with a fixed 3.81% interest rate.
We effectuated the Woodstar II Portfolio acquisitions via a contribution of the properties by third parties (the
“Contributors”) to SPT Dolphin Intermediate LLC (“SPT Dolphin”), a newly-formed, wholly-owned subsidiary of the
Company. In exchange for the contribution, the Contributors received cash, Class A units of SPT Dolphin (the “Class A
Units”) and rights to receive additional Class A Units if certain contingent events occur. The Class A unitholders have
the right to redeem their Class A Units for consideration equal to the current share price of the Company’s common
stock on a one-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the
determination of the Company.
The 2018 Closing resulted in the Contributors receiving cash of $225.8 million, 7,403,731 Class A Units and
rights to receive an additional 1,411,642 Class A Units if certain contingent events occur. In aggregate, the 2018 Closing
and 2017 Closing have resulted in the Contributors receiving cash of $310.7 million, 10,183,505 Class A Units and
rights to receive an additional 1,910,563 Class A Units if certain contingent events occur. During the years ended
December 31, 2020, 2019 and 2018, we issued 62,323, 120,926 and 1,727,314, respectively, of the total 1,910,563
contingent Class A Units to the Contributors. During the years ended December 31, 2020 and 2019, redemptions of
493,318 and 974,176, respectively, of the Class A Units were received and settled in common stock or cash. No
redemptions of Class A Units occurred during the year ended December 31, 2018. In consolidation, the issued Class A
Units are reflected as non-controlling interests in consolidated subsidiaries on our consolidated balance sheets.
129
Since substantially all of the fair value of the properties acquired was concentrated in a group of similar
identifiable assets, the Woodstar II Portfolio acquisitions were accounted for in accordance with the asset acquisition
provisions of ASC 805.
Master Lease Portfolio
During the year ended December 31, 2018, we sold four retail properties and three industrial properties within
the Master Lease Portfolio for $235.4 million, recognizing a gain on sale of $28.5 million within gain on sale of
investments and other assets in our consolidated statement of operations. There were no properties sold within the Master
Lease Portfolio during the years ended December 31, 2020 and 2019.
Purchase Price Allocations of Business Combinations
We applied the business combination provisions of ASC 805 in accounting for our acquisition of the
Infrastructure Lending Segment. In doing so, we recorded all identifiable assets acquired and liabilities assumed at fair
value as of the acquisition dates.
The following table summarizes the identified assets acquired and liabilities assumed as of the acquisition dates
(amounts in thousands):
2018
Infrastructure
Assets acquired:
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total identifiable assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed:
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Lending Segment
1,649,630
319,710
65,060
13,843
2,048,243
8,817
282
9,099
2,039,144
$
Goodwill represents the excess of the purchase price over the fair value of the underlying assets acquired and
liabilities assumed. This determination of goodwill resulting from the Infrastructure Lending Segment acquisition is as
follows (amounts in thousands):
2018
Infrastructure
Lending Segment
2,158,553
2,039,144
119,409
$
$
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130
Pro Forma Operating Data (Unaudited)
The unaudited pro forma revenues and net income attributable to the Company for the year ended December 31,
2018, assuming the Infrastructure Lending Segment was acquired on January 1, 2018, are as follows (amounts in
thousands, except per share amounts):
For the Year Ended
(Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2018
1,182,892
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
392,505
Net income attributable to STWD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.47
Net income per share - Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.44
Net income per share - Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4. Restricted Cash
A summary of our restricted cash as of December 31, 2020 and 2019 is as follows (amounts in thousands):
Cash collateral for derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash restricted by lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held on behalf of borrowers and tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
$
2020
89,323
42,992
19,517
7,113
$ 158,945
2019
37,912
40,818
11,903
5,010
95,643
$
$
131
5. 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 for either. The following tables summarize
our investments in mortgages and loans as of December 31, 2020 and 2019 (dollars in thousands):
December 31, 2020
Loans held-for-investment:
Commercial loans:
First mortgages (3) . . . . . . . . . . . . . . . . . . . . . .
Subordinated mortgages (4) . . . . . . . . . . . . . . .
Mezzanine loans (3) . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial loans . . . . . . . . . . . . . . . . . .
Infrastructure first priority loans (5) . . . . . . . . . . .
Residential loans, fair value option (6) . . . . . . . . .
Total loans held-for-investment . . . . . . . . . . .
Loans held-for-sale:
Residential, fair value option (6) . . . . . . . . . . . . .
Commercial, fair value option . . . . . . . . . . . . . . .
Infrastructure, lower of cost or fair value (5) . . . .
Total loans held-for-sale . . . . . . . . . . . . . . . . .
Total gross loans . . . . . . . . . . . . . . . . . . . . . .
Credit loss allowances:
Commercial loans held-for-investment . . . . . . . . .
Infrastructure loans held-for-investment . . . . . . . .
Total allowances . . . . . . . . . . . . . . . . . . . . . . .
Total net loans . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019
Loans held-for-investment:
Commercial loans:
First mortgages (3) . . . . . . . . . . . . . . . . . . . . . .
Subordinated mortgages (4) . . . . . . . . . . . . . . .
Mezzanine loans (3) . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial loans . . . . . . . . . . . . . . . . . .
Infrastructure first priority loans . . . . . . . . . . . . . .
Residential loans, fair value option (6) . . . . . . . . .
Total loans held-for-investment . . . . . . . . . . .
Loans held-for-sale:
Residential, fair value option (6) . . . . . . . . . . . . .
Commercial, fair value option . . . . . . . . . . . . . . .
Infrastructure, lower of cost or fair value . . . . . . .
Total loans held-for-sale . . . . . . . . . . . . . . . . .
Total gross loans . . . . . . . . . . . . . . . . . . . . . .
Credit loss allowances:
Commercial loans held-for-investment . . . . . . . . .
Infrastructure loans held-for-investment . . . . . . . .
Total held-for-investment allowances . . . . . . .
Infrastructure loans held-for-sale with a fair
value allowance . . . . . . . . . . . . . . . . . . . . . . . . .
Total allowances . . . . . . . . . . . . . . . . . . . . . . .
Total net loans . . . . . . . . . . . . . . . . . . . . . . . .
Carrying
Value
Face
Amount
Weighted
Average
Coupon (1)
Weighted
Average Life
(“WAL”)
(years)(2)
5.3 %
8.8 %
10.1 %
8.9 %
4.4 %
6.0 %
6.0 %
3.9 %
3.1 %
5.8 %
8.8 %
11.0 %
8.2 %
5.6 %
6.1 %
6.2 %
3.9 %
3.3 %
1.5
2.8
1.6
1.8
4.3
N/A (7)
N/A (7)
10.0
3.2
2.0
3.4
1.9
1.6
4.9
N/A (7)
N/A (7)
10.0
2.1
$
$
$
$
8,978,373
72,257
619,352
33,626
9,703,608
1,439,940
86,796
11,230,344
820,807
90,789
120,900
1,032,496
12,262,840
7,962,788
77,055
484,408
66,525
8,590,776
1,416,164
654,925
10,661,865
587,144
160,635
121,271
869,050
11,530,915
$
$
$
8,931,772
71,185
620,319
30,284
9,653,560
1,420,273
90,684
11,164,517
841,963
90,332
120,540
1,052,835
12,217,352
(69,611)
(7,833)
(77,444)
12,139,908
7,928,026
75,724
484,164
62,555
8,550,469
1,397,448
671,572
10,619,489
605,384
159,238
119,724
884,346
11,503,835
(33,415)
—
(33,415)
(196)
(33,611)
11,470,224
$
132
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Calculated using LIBOR or other applicable index rates as of December 31, 2020 and 2019 for variable rate
loans.
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.
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 $877.3 million and $967.0 million
being classified as first mortgages as of December 31, 2020 and 2019, respectively.
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.
During the year ended December 31, 2020, $104.3 million of infrastructure loans held-for-sale were reclassified
into loans held-for-investment and $174.6 million of infrastructure loans held-for-investment were reclassified
into loans held-for-sale.
During the year ended December 31, 2020, $575.3 million of residential loans held-for-investment were
reclassified into loans held-for-sale. During the year ended December 31, 2019, $340.9 million of residential
loans held-for-sale were reclassified into residential loans held-for-investment.
Residential loans have a weighted average remaining contractual life of 27.9 years and 29.3 years as of
December 31, 2020 and 2019, respectively.
During the year ended December 31, 2018, the Company received distributions totaling $15.1 million from a
profit participation in a mortgage loan that was repaid in 2016. The loan was secured by a retail and hospitality property
located in the Times Square area of New York City. The profit participation is accounted for as a loan in accordance with
the acquisition, development and construction accounting guidance within ASC 310-10, which resulted in distributions
in excess of basis being recognized within interest income in our consolidated statements of operations. There were no
distributions from profit participations received during the years ended December 31, 2020 and 2019.
As of December 31, 2020, our variable rate loans held-for-investment were as follows (dollars in thousands):
December 31, 2020
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,003,590
1,420,273
Infrastructure loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total variable rate loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,423,863
4.3 %
3.8 %
4.2 %
Carrying
Value
Weighted-average
Spread Above Index
Credit Loss Allowances
As discussed in Note 2, we do not have a history of realized credit losses on our HFI loans and HTM securities,
so we have subscribed to third party database services to provide us with industry losses for both commercial real estate
and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and
securities on a collective basis within our commercial real estate and infrastructure portfolios.
For our commercial loans, we utilize a loan loss model that is widely used among banks and commercial
mortgage REITs and is marketed by a leading CMBS data analytics provider. It employs logistic regression to forecast
expected losses at the loan level based on a commercial real estate loan securitization database that contains activity
dating back to 1998. We provide specific loan-level inputs which include loan-to-stabilized-value (“LTV”) and debt
service coverage ratio (DSCR) metrics, as well as principal balances, property type, location, coupon, origination year,
133
term, subordination, expected repayment dates and future fundings. We also select from a group of independent five-
year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. We
categorize the results by LTV range, which we consider the most significant indicator of credit quality for our
commercial loans, as set forth in the credit quality indicator table below. A lower LTV ratio typically indicates a lower
credit loss risk.
The macroeconomic forecasts do not differentiate among property types or asset classes. Instead, these
forecasts reference general macroeconomic growth factors which apply broadly across all assets. However, the
COVID-19 pandemic has had a more negative impact on certain property types, principally retail and hospitality, which
have withstood extended government mandated closures, and more recently office, which is experiencing lower demand
due to remote working arrangements. The broad macroeconomic forecasts do not account for such differentiation.
Accordingly, we have selected a more adverse macroeconomic recovery forecast related to these property types in
determining our credit loss allowance.
For our infrastructure loans, we utilize a database of historical infrastructure loan performance that is shared
among a consortium of banks and other lenders and compiled by a major bond credit rating agency. The database is
representative of industry-wide project finance activity dating back to 1983. We derive historical loss rates from the
database filtered by industry, sub-industry, term and construction status for each of our infrastructure loans. Those
historical loss rates reflect global economic cycles over a long period of time as well as average recovery rates. We
categorize the results between the power and oil and gas industries, which we consider the most significant indicator of
credit quality for our infrastructure loans, as set forth in the credit quality indicator table below.
As discussed in Note 2, we use a discounted cash flow or collateral value approach, rather than the industry loan
loss approach described above, to determine credit loss allowances for any credit deteriorated loans.
We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or
value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the
collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations
is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to
refinance the loan and/or (iii) the collateral’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 collateral. In addition, we consider the
overall economic environment, real estate or industry sector, and geographic sub-market in which the borrower operates.
Such 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.
134
The significant credit quality indicators for our loans measured at amortized cost, which excludes loans held-
for-sale, were as follows as of December 31, 2020 (dollars in thousands):
As of December 31, 2020
Commercial loans:
Credit quality indicator:
2020
Term Loans
Amortized Cost Basis by Origination Year
2019
2017
2018
2016
Revolving Loans
Amortized Cost Amortized
Cost Basis
Total
Total
Credit
Loss
Allowance
Prior
LTV < 60% . . . . . . . . $ 751,090 $ 1,087,183 $ 1,022,495 $ 1,062,362 $ 134,420 $ 267,650 $
LTV 60% - 70% . . . . .
LTV > 70% . . . . . . . .
Credit deteriorated . . .
Defeased and other . . .
Total commercial . . $ 1,452,283 $ 3,359,484 $ 2,989,500 $ 1,247,700 $ 187,902 $ 416,691 $
301,225 1,640,009 1,625,379
312,640
632,292
399,968
—
28,986
—
—
—
—
36,581
141,002
7,755
—
53,482
—
—
—
39,195
75,340
11,977
22,529
— $ 4,325,200 $
8,801
—
24,842
3,695,871
19,946
1,561,242
—
16,022
48,718
—
—
—
22,529
— $ 9,653,560 $ 69,611
Infrastructure loans:
Credit quality indicator:
74,817 $ 222,733 $ 268,960 $ 109,604 $ 166,922 $ 211,795 $
Power . . . . . . . . . . . . $
Oil and gas . . . . . . . . .
Total infrastructure . $
4,295
3,538
7,833
Residential loans held-for-investment, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,217,352 $ 77,444
18,996 $ 1,420,273 $
90,684
1,052,835
74,817 $ 467,502 $ 370,637 $ 109,604 $ 166,922 $ 211,795 $
13,963 $ 1,068,794 $
351,479
244,769
101,677
5,033
—
—
—
—
As of December 31, 2020, we had credit deteriorated commercial loans with an amortized cost basis of $48.7
million, of which $29.0 million had no credit loss allowance. These loans were on nonaccrual status, with the cost
recovery method of interest income recognition applied. In addition to these credit deteriorated loans, we had a $184.1
million commercial loan and $18.6 million of residential loans that were 90 days or greater past due at December 31,
2020. Any loans which are modified to provide for the deferral of interest are not considered past due and are accounted
for in accordance with our revenue recognition policy on interest income.
The following table presents the activity in our credit loss allowance for funded loans and unfunded
commitments (amounts in thousands):
Year Ended December 31, 2020
Credit loss allowance at December 31,
Funded Commitments Credit Loss Allowance
Loans Held-for-Investment
Commercial
Infrastructure
Loans
Held-for-Sale
Infrastructure
Total
Funded Loans
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
33,415
$
— $
196 $
33,611
Cumulative effect of ASC 326 effective
January 1, 2020 . . . . . . . . . . . . . . . . . . . .
Credit loss provision (reversal), net . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss allowance at December 31,
10,112
48,711
(22,627)(1)
—
10,328
(2,495)
—
—
—
(125)
(71)
—
20,440
46,091
(22,698)
—
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
69,611
$
7,833 $
— $
77,444
(1) Primarily relates to the charge-off of the credit loss allowance relating to credit deteriorated first mortgage and
contiguous mezzanine loans that were eliminated as a result of consolidating the net assets of the borrower entities
upon exercising control over their pledged equity interests in October 2020.
135
Year Ended December 31, 2020
Credit loss allowance at December 31, 2019 . . . . .
Cumulative effect of ASC 326 effective
January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss reversal, net . . . . . . . . . . . . . . . . . . . . . .
Credit loss allowance at December 31, 2020 . . . . .
Memo: Unfunded commitments as of
December 31, 2020 (2) . . . . . . . . . . . . . . . . . . . . .
$
$
$
Unfunded Commitments Credit Loss Allowance (1)
Loans Held-for-Investment
Commercial
Infrastructure
Total
—
$
— $
8,348
(3,090)
5,258
1,341,939
$
$
2,205
(1,393)
812 $
79,593 $
1,421,532
—
10,553
(4,483)
6,070
(1) Included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheet.
(2) Represents amounts expected to be funded (see Note 22).
Loan Portfolio Activity
The activity in our loan portfolio was as follows (amounts in thousands):
Held-for-Investment Loans
Commercial
(10,112)
2,753,782
143,818
(443,793)
Year Ended December 31, 2020
Balance at December 31, 2019 . . . . . $ 8,517,054
Cumulative effect of ASC 326
effective January 1, 2020 . . . . . . . .
Acquisitions/originations/
additional funding . . . . . . . . . . . . . .
Capitalized interest (1) . . . . . . . . . . .
Basis of loans sold (2) . . . . . . . . . . .
Loan maturities/principal
repayments . . . . . . . . . . . . . . . . . . .
Discount accretion/premium
amortization . . . . . . . . . . . . . . . . . .
Changes in fair value . . . . . . . . . . . .
Unrealized foreign currency
translation gain (loss) . . . . . . . . . . .
Credit loss (provision) reversal,
net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to/from other asset
classifications . . . . . . . . . . . . . . . . . .
Balance at December 31, 2020 . . . . . $ 9,583,949
39,642
—
(1,398,991)
102,748
(48,711)
Infrastructure Residential
$ 1,397,448 $
671,572 $
Held-for-Sale Loans
884,150
Total Loans
$ 11,470,224
(10,328)
—
—
(20,440)
278,694
195
—
100,720
—
(604)
2,204,203
—
(2,862,606)
5,337,399
144,013
(3,307,003)
(189,288)
(90,273)
(142,644)
(1,821,196)
—
(15,382)
110
148,506
42,199
133,124
(1,291)
102,553
125
(46,091)
2,447
—
1,096
2,495
—
—
(575,349)
(71,488)(3)
(70,319)
$ 1,412,440 $
90,684 $
1,052,835
822,282 (4)
105,126
$ 12,139,908
136
Year Ended December 31, 2019
Balance at December 31, 2018 . . . . $
Acquisitions/originations/
additional funding . . . . . . . . . . . . .
Capitalized interest (1) . . . . . . . . . .
Basis of loans sold (2) . . . . . . . . . . .
Loan maturities/principal
repayments . . . . . . . . . . . . . . . . . .
Discount accretion/premium
Held-for-Investment Loans
Loans
Transferred
As Secured
Commercial
Infrastructure Residential Held-for-Sale Loans Borrowings Total Loans
7,075,577 $ 1,456,779
— $
1,187,552 $
74,346 $
9,794,254
4,161,584
110,632
(743,425)
902,053
—
—
394,697
—
(106)
3,636,380
—
(3,567,859)
—
—
—
9,094,714
110,632
(4,311,390)
(2,172,068)
(832,998)
(62,704)
(162,376)
(74,692)
(3,304,838)
amortization . . . . . . . . . . . . . . . . .
Changes in fair value . . . . . . . . . . .
Unrealized foreign currency
translation (loss) gain . . . . . . . . . . .
Credit loss provision, net . . . . . . . . .
Loan foreclosures. . . . . . . . . . . . . . .
Transfer to/from other asset
30,128
—
38,050
(2,616)
(27,303)
2,072
—
—
(3,314)
—
—
(1,314)
2,841
72,915
346
—
—
—
—
2,105
(1,196)
—
—
—
—
35,387
71,601
40,155
(7,126)
(27,303)
classifications . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . $
46,495
(127,144)
8,517,054 $ 1,397,448 $
340,999
671,572 $
(286,212)
884,150 $
—
(25,862)
— $ 11,470,224
Held-for-Investment Loans
Loans
Transferred
As Secured
Year Ended December 31, 2018
Balance at December 31, 2017 . . . . . $
Acquisitions/originations/
Commercial
6,561,296 $
Infrastructure Residential Held-for-Sale Loans Borrowings Total Loans
7,382,641
745,743 $
74,403 $
1,199 $
— $
additional funding . . . . . . . . . . . . . .
Acquisition of Infrastructure
Lending Portfolio . . . . . . . . . . . . . . .
Capitalized interest (1) . . . . . . . . . . .
Basis of loans sold (2) . . . . . . . . . . . .
Loan maturities/principal
4,300,406
131,115
146
2,291,477
—
6,723,144
—
63,047
(835,358)
1,458,835
—
—
—
—
—
510,505
—
(2,246,989)
—
—
—
1,969,340
63,047
(3,082,347)
repayments . . . . . . . . . . . . . . . . . . .
(2,943,602)
(133,271)
(1,345)
(194,140)
(308)
(3,272,666)
Discount accretion/premium
amortization . . . . . . . . . . . . . . . . . .
Changes in fair value . . . . . . . . . . . .
Unrealized foreign currency
translation (loss) gain . . . . . . . . . . . .
Credit loss provision, net . . . . . . . . . .
Transfer to/from other asset
classifications . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . $
37,748
—
100
—
(26,645)
(34,821)
(46,494)
—
—
—
7,075,577 $ 1,456,779 $
—
—
—
—
—
40,522
251
—
(5,696)
—
—
—
—
74,346 $
—
— $
46,130
1,187,552 $
38,099
40,522
(32,341)
(34,821)
(364)
9,794,254
(1) Represents accrued interest income on loans whose terms do not require current payment of interest.
(2) See Note 12 for additional disclosure on these transactions.
(3) Represents the net carrying value of credit deteriorated first mortgage and contiguous mezzanine loans related to a
residential conversion project located in New York City that is eliminated as a result of consolidating the net assets
of the borrower entities upon exercising control over their pledged equity interests in October 2020.
(4) Includes $176.6 million of residential loans transferred from VIE assets upon redemption of a consolidated RMBS
trust.
137
6. Investment Securities
Investment securities were comprised of the following as of December 31, 2020 and 2019 (amounts in
thousands):
Carrying Value as of December 31,
2019
2020
RMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS, fair value option (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS, fair value option (1), (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
HTM debt securities, amortized cost net of credit loss allowance of
$5,675 and $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity security, fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal—Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE eliminations (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
167,349
235,997
1,209,030
538,605
11,247
2,162,228
(1,425,570)
736,658
$
$
189,576
147,034
1,295,363
570,638
12,664
2,215,275
(1,405,037)
810,238
(1)
(2)
Certain fair value option CMBS and RMBS are eliminated in consolidation against VIE liabilities pursuant to
ASC 810.
Includes $179.5 million and $186.6 million of non-controlling interests in the consolidated entities which hold
certain of these CMBS as of December 31, 2020 and 2019, respectively.
Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):
RMBS,
RMBS, fair CMBS, fair
HTM
Securitization
available-for-sale value option value option Securities VIEs (1)
Total
Year Ended December 31, 2020
Purchases/fundings . . . . . . . . . . . . . . . . . $
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collections . . . . . . . . . . . . . . . .
Redemptions . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2019
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collections . . . . . . . . . . . . . . . .
Year Ended December 31, 2018
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisition of Infrastructure Lending
Portfolio . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collections . . . . . . . . . . . . . . . .
— $ 282,368 $ 49,416 $ 22,408 $ (331,784) $ 22,408
—
7,940
83,533
26,000
—
—
(165,494)
(69,447)
(10,474)
37,867
30,079
—
—
52,704
—
135,567
44,197
10,474
— $ 120,103 $ 238,213 $ 91,162 $ (351,220) $ 98,258
—
7,326
205,660
26,929
(184,540)
(45,642)
150,365
40,490
—
167,383
41,501
16,500
— $ 90,982 $ 323,071 $463,810 $ (385,463) $ 492,400
—
13,264
34,763
—
—
1,439
—
105,637
114,545
65,060
—
327,207
—
(102,474)
(95,030)
65,060
16,427
382,924
(1)
Represents RMBS and CMBS, fair value option amounts eliminated due to our consolidation of securitization
VIEs. These amounts are reflected as issuance or repayment of debt of, or distributions from, consolidated VIEs
in our consolidated statements of cash flows.
RMBS, Available - for - Sale
The Company classified all of its RMBS not eliminated in consolidation as available - for - sale as of
December 31, 2020 and 2019. These RMBS are reported at fair value in the balance sheet with changes in fair value
recorded in AOCI.
138
The tables below summarize various attributes of our investments in available - for - sale RMBS as of
December 31, 2020 and 2019 (amounts in thousands):
Unrealized Gains or (Losses)
Recognized in AOCI
Amortized
Cost
Credit
Loss
Allowance
Net
Basis
Gross
Gross
Unrealized Unrealized Fair Value
Gains
Losses
Net
Adjustment Fair Value
December 31, 2020
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 123,292 $
December 31, 2019
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,580 N/A $ 138,580 $ 51,310 $
— $ 123,292 $ 44,123 $
(66) $ 44,057 $ 167,349
(314) $ 50,996 $ 189,576
Weighted Average
Coupon (1)
Weighted Average
Rating
WAL
(Years) (2)
December 31, 2020
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.3 %
B+
5.7
(1)
(2)
Calculated using the December 31, 2020 one-month LIBOR rate of 0.144% for floating rate securities.
Represents the remaining WAL of each respective group of securities as of the balance sheet date. The WAL of
each individual security is calculated using projected amounts and projected timing of future principal
payments.
As of December 31, 2020, approximately $144.9 million, or 86.6%, of RMBS were variable rate. We purchased
all of the RMBS at a discount, a portion of which is accreted into income over the expected remaining life of the
security. The majority of the income from this strategy is earned from the accretion of this accretable discount.
We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of
which was $0.8 million, $1.5 million and $1.8 million for the years ended December 31, 2020, 2019 and 2018,
respectively, recorded as management fees in the accompanying consolidated statements of operations.
During the year ended December 31, 2018, we sold RMBS for proceeds of $13.3 million and realized gross
gains of $3.5 million using the specific identification cost method. There were no sales of RMBS during the years ended
December 31, 2020 and 2019.
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 December 31, 2020 and 2019, and for which an allowance for
credit losses has not been recorded (amounts in thousands):
Estimated Fair Value
Unrealized Losses
Securities with a Securities with a Securities with a Securities with a
loss greater than
12 months
loss greater than
12 months
loss less than
12 months
loss less than
12 months
As of December 31, 2020
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of December 31, 2019
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
438 $
1,195 $
(25) $
(41)
— $
1,380 $
— $
(314)
139
As of December 31, 2020 and 2019, there were two securities and one security with unrealized losses reflected
in the table above. After evaluating the securities and recording adjustments for credit losses, we concluded that the
remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’
estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not
intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior
to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise
conclude that we would not recover our cost. Credit losses 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 net amortized cost basis. Significant judgment is used in projecting cash flows for
our non-agency RMBS. As a result, actual income and/or credit losses could be materially different from what is
currently projected and/or reported.
CMBS and RMBS, Fair Value Option
As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for certain
CMBS and RMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation
of securitization VIEs. As of December 31, 2020, the fair value and unpaid principal balance of CMBS where we have
elected the fair value option, excluding the notional value of interest-only securities and before consolidation of
securitization VIEs, were $1.2 billion and $2.8 billion, respectively. As of December 31, 2020, the fair value and unpaid
principal balance of RMBS where we have elected the fair value option, excluding the notional value of interest-only
securities and before consolidation of securitization VIEs, were $236.0 million and $142.1 million, respectively. The
$1.4 billion total fair value balance of CMBS and RMBS represents our economic interests in these assets. However, as a
result of our consolidation of securitization VIEs, the vast majority of this fair value (all except $19.5 million at
December 31, 2020) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option
investment securities.
As of December 31, 2020, $96.9 million of our CMBS were variable rate and none of our RMBS were variable
rate.
HTM Debt Securities, Amortized Cost
The table below summarizes our investments in HTM debt securities as of December 31, 2020 and 2019
(amounts in thousands):
Amortized
Cost Basis
Credit Loss
Allowance
Net Carrying Gross Unrealized Gross Unrealized
Amount
Holding Gains
Holding Losses
Fair Value
December 31, 2020
CMBS . . . . . . . . . . . . . . . $ 339,059
166,614
Preferred interests . . . . . .
38,607
Infrastructure bonds . . . . .
Total . . . . . . . . . . . . . . $ 544,280
December 31, 2019
CMBS . . . . . . . . . . . . . . . $ 383,473
142,012
Preferred interests . . . . . .
45,153
Infrastructure bonds . . . . .
Total . . . . . . . . . . . . . . $ 570,638
$
$
$
$
—
(2,749)
(2,926)
(5,675)
$ 339,059 $
163,865
35,681
$ 538,605 $
— $
432
415
847 $
(23,286) $
(913)
—
(24,199) $
315,773
163,384
36,096
515,253
—
—
—
—
$ 383,473 $
142,012
45,153
$ 570,638 $
946 $
1,148
—
2,094 $
(3,001) $
(353)
(651)
(4,005) $
381,418
142,807
44,502
568,727
140
The following table presents the activity in our credit loss allowance for HTM debt securities (amounts in
thousands):
Preferred
Interests
Infrastructure
Bonds
Total HTM
Credit Loss
Allowance
Year Ended December 31, 2020
Credit loss allowance at December 31, 2019 . . . . . . . . . . . . . . . . . . .
Cumulative effect of ASC 326 effective January 1, 2020:
Beginning accumulated deficit charge . . . . . . . . . . . . . . . . . . . . .
Gross-up of PCD bond amortized cost basis . . . . . . . . . . . . . . . .
Credit loss provision (reversal), net . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit loss allowance at December 31, 2020 . . . . . . . . . . . . . . . . . . .
$
—
$
—
$
—
1,114
—
1,635
2,749
$
179
2,837
(90)
2,926
$
1,293
2,837
1,545
5,675
$
The table below summarizes the maturities of our HTM debt securities by type as of December 31, 2020
(amounts in thousands):
Less than one year . . . . . . . . . . . . . . . . . . . . . . $
One to three years . . . . . . . . . . . . . . . . . . . . . .
Three to five years . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Equity Security, Fair Value
CMBS
339,059 $
—
—
—
339,059
$
Preferred
Interests
Infrastructure
Bonds
— $
163,865
—
—
163,865
$
— $
—
—
35,681
35,681
$
Total
339,059
163,865
—
35,681
538,605
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. The fair value of the investment remeasured in USD was $11.2 million and $12.7 million as of
December 31, 2020 and 2019, respectively. As of December 31, 2020, our shares represent an approximate 2% interest
in SEREF.
141
7. Properties
Our properties are held within the following portfolios:
Woodstar I Portfolio
The Woodstar I Portfolio is comprised of 32 affordable housing communities with 8,948 units concentrated
primarily in the Tampa, Orlando and West Palm Beach metropolitan areas. During the year ended December 31, 2015,
we acquired 18 of the 32 affordable housing communities of the Woodstar I Portfolio with the final 14 communities
acquired during the year ended December 31, 2016. The Woodstar I Portfolio includes total gross properties and lease
intangibles of $635.2 million and debt of $572.5 million as of December 31, 2020.
Woodstar II Portfolio
The Woodstar II Portfolio is comprised of 27 affordable housing communities with 6,109 units concentrated
primarily in Central and South Florida. We acquired eight of the 27 affordable housing communities in December 2017,
with the final 19 communities acquired during the year ended December 31, 2018. The Woodstar II Portfolio includes
total gross properties and lease intangibles of $610.0 million and debt of $437.0 million as of December 31, 2020. Refer
to Note 3 for further discussion of the Woodstar II Portfolio.
Medical Office Portfolio
The Medical Office Portfolio is comprised of 34 medical office buildings acquired during the year ended
December 31, 2016. These properties, which collectively comprise 1.9 million square feet, are geographically dispersed
throughout the U.S. and primarily affiliated with major hospitals or located on or adjacent to major hospital campuses.
The Medical Office Portfolio includes total gross properties and lease intangibles of $760.2 million and debt of $592.4
million as of December 31, 2020.
Master Lease Portfolio
The Master Lease Portfolio is comprised of 16 retail properties geographically dispersed throughout the U.S.,
with more than 50% of the portfolio, by carrying value, located in Florida, Texas and Minnesota. These properties,
which we acquired in September 2017, collectively comprise 1.9 million square feet and were leased back to the seller
under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations.
The Master Lease Portfolio includes total gross properties of $343.8 million and debt of $192.7 million as of
December 31, 2020. Refer to Note 3 for further discussion of the Master Lease Portfolio.
Investing and Servicing Segment Property Portfolio
The REIS Equity Portfolio is comprised of 15 commercial real estate properties and one equity interest in an
unconsolidated commercial real estate property which we acquired from CMBS trusts over the previous five years. The
REIS Equity Portfolio includes total gross properties and lease intangibles of $269.5 million and debt of $192.8 million
as of December 31, 2020. Refer to Note 3 for further discussion of the REIS Equity Portfolio.
142
The table below summarizes our properties held as of December 31, 2020 and December 31, 2019 (dollars in
thousands):
Property Segment
Depreciable Life December 31, 2020 December 31, 2019
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 – 15 years $
Buildings and building improvements . . . . . . . . . . . . . . . . . . . . . . 5 – 45 years
Furniture & fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 – 7 years
484,846 $
1,690,701
59,632
484,397
1,687,756
52,567
Investing and Servicing Segment
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 – 15 years
Buildings and building improvements . . . . . . . . . . . . . . . . . . . . . . 3 – 40 years
Furniture & fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 – 5 years
50,585
179,014
2,606
54,052
182,048
2,139
Commercial and Residential Lending Segment (1)
Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 – 10 years
Buildings and building improvements . . . . . . . . . . . . . . . . . . . . . . 10 – 23 years
Construction in progress (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
Properties, cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
11,416
19,251
75,245
2,573,296
(302,143)
2,271,153 $
11,386
16,285
—
2,490,630
(224,190)
2,266,440
(1)
Represents properties acquired through loan foreclosure or exercise of control over loan borrower pledged
equity interests.
(2)
Represents assets related to the borrower entity that we exercised control over. Refer to Note 5 for further detail.
During the year ended December 31, 2020, we sold an operating property and an outparcel for $25.0 million. In
connection with these sales, we recognized a total gain of $7.9 million within gain on sale of investments and other
assets in our consolidated statement of operations, of which $0.1 million was attributable to non-controlling interests.
During the year ended December 31, 2019, we sold $407.2 million of net property assets relating to the Ireland
Portfolio. Refer to Note 3 for further discussion. Also during the year ended December 31, 2019, we sold four operating
properties within the REIS Equity Portfolio for $145.9 million. In connection with these REIS Equity Portfolio sales, we
recognized a total gain of $59.7 million within gain on sale of investments and other assets in our consolidated statement
of operations, of which $5.3 million was attributable to non-controlling interests.
During the year ended December 31, 2018, we sold 16 operating properties for $313.3 million. In connection
with these sales, we recognized a total gain of $55.1 million within gain on sale of investments and other assets in our
consolidated statement of operations, of which $5.1 million was attributable to non-controlling interest. One of these
properties was acquired by a third party which already held a $0.3 million non-controlling interest in the property.
Future rental payments due to us from tenants under existing non-cancellable operating leases for each of the
next five years and thereafter are as follows (in thousands):
187,924
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
103,617
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,914
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
85,964
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78,050
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
677,142
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,226,611
143
8. Investment in Unconsolidated Entities
The table below summarizes our investments in unconsolidated entities as of December 31, 2020 and 2019
(dollars in thousands):
Participation /
Ownership % (1)
Carrying value as of December 31,
2020
2019
Equity method investments:
Retail Fund (see Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity interest in a natural gas power plant . . . . . . . . . . . . . . . . . . . . .
Investor entity which owns equity in an online real estate company .
Equity interests in commercial real estate . . . . . . . . . . . . . . . . . . . . . .
Equity interest in and advances to a residential mortgage
33%
10%
50%
50%
originator (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Various . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
N/A
25% - 50%
$
— $
25,095
9,397
1,543
17,852
8,831
62,718
—
25,862
9,473
1,907
12,002
8,339
57,583
Other equity investments:
Equity interest in a servicing and advisory business (3) . . . . . . . . . . .
Investment funds which own equity in a loan servicer and other
2%
17,584
—
real estate assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Various, including FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4% - 6%
0% - 2%
7,267
20,485
45,336
$ 108,054 $
9,225
17,521
26,746
84,329
(1)
(2)
(3)
None of these investments are publicly traded and therefore quoted market prices are not available.
Includes a $4.5 million subordinated loan as of both December 31, 2020 and 2019.
During the year ended December 31, 2019, we received a capital distribution of $8.4 million, our equity interest
was reduced to 4% and the carrying value was reduced to zero. During April 2020, we sold 37% of our equity
interest for $10.3 million in cash, reducing our interest to 2%. In connection with the sale, we recognized a gain
of $10.3 million. Because the sale represented an observable price change in an orderly transaction, we also
increased the value of our remaining investment to reflect its implied fair value. In doing so, we recognized a
gain of $17.6 million. These amounts were recognized within earnings (loss) from unconsolidated entities in our
consolidated statement of operations during the year ended December 31, 2020.
We own a 33% equity interest in a fund that owns four regional shopping malls (the “Retail Fund”). The fund
is an investment company which measures its assets at fair value on a recurring basis. We report our interest in the
Retail Fund on a three-month lag basis at its liquidation value. As of December 31, 2019, we impaired the remainder of
our investment based on our estimate of unrealized decreases in the fair value of the underlying real estate properties.
Such decreases were recognized by the Retail Fund during the period included in the year ended December 31, 2020.
As of December 31, 2020, the carrying value of our equity investment in a residential mortgage originator
exceeded the underlying equity in net assets of such investee by $1.6 million. This difference is the result of the
Company recording its investment in the investee at its acquisition date fair value, which included certain non-
amortizing intangible assets not recognized by the investee. Should the Company determine these intangible assets held
by the investee are impaired, the Company will recognize such impairment loss through earnings from unconsolidated
entities in our consolidated statement of operations, otherwise, such difference between the carrying value of our equity
investment in the residential mortgage originator and the underlying equity in the net assets of the residential mortgage
originator will continue to exist.
Other than our equity interest in the residential mortgage originator, 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
December 31, 2020.
144
During the year ended December 31, 2020, we did not become aware of (i) any observable price changes in our
other equity investments accounted for under the fair value practicability election, except as described above with respect
to the servicing and advisory business, or (ii) any indicators of impairment.
9. Goodwill and Intangibles
Goodwill
Infrastructure Lending Segment
The Infrastructure Lending Segment’s goodwill of $119.4 million at both December 31, 2020 and 2019
represents the excess of consideration transferred over the fair value of net assets acquired on September 19, 2018 and
October 15, 2018. The goodwill recognized is attributable to value embedded in the acquired Infrastructure Lending
Segment’s lending platform and is fully tax deductible over 15 years.
As discussed in Note 2, goodwill is tested for impairment at least annually. Based on our quantitative
assessment during the fourth quarter of 2020, we determined that the fair value of the Infrastructure Lending Segment
reporting unit to which goodwill is attributed exceeded its carrying value including goodwill. Therefore, we concluded
that the goodwill attributed to the Infrastructure Lending Segment was not impaired.
LNR Property LLC (“LNR”)
The Investing and Servicing Segment’s goodwill of $140.4 million at both December 31, 2020 and 2019
represents the excess of consideration transferred over the fair value of net assets of LNR acquired on April 19, 2013.
The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes a 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. The tax deductible component of this
goodwill as of April 19, 2013 was $149.9 million and is deductible over 15 years.
Based on our qualitative assessment during the fourth quarter of 2020, we determined that it is not more likely
than not that the fair value of the Investing and Servicing Segment reporting unit to which goodwill is attributed is less
than its carrying value including goodwill. Therefore, we concluded that the goodwill attributed to the Investing and
Servicing Segment was not impaired.
Future changes in the expectations of the impact of COVID-19 on our operations, financial performance and
cash flows could cause our goodwill to be impaired.
Intangible Assets
Servicing Rights Intangibles
In connection with the LNR acquisition, we identified domestic servicing rights that existed at the purchase
date, based upon the expected future cash flows of the associated servicing contracts. As of December 31, 2020 and
2019, the balance of the domestic servicing intangible was net of $41.4 million and $26.2 million, respectively, which
was eliminated in consolidation pursuant to ASC 810 against VIE assets in connection with our consolidation of
securitization VIEs. Before VIE consolidation, as of December 31, 2020 and 2019, the domestic servicing intangible had
a balance of $54.6 million and $43.2 million, respectively, which represents our economic interest in this asset.
Lease Intangibles
In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and
favorable lease intangible assets associated with certain non-cancelable operating leases of the acquired properties.
145
The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and
lease intangibles, as of December 31, 2020 and 2019 (amounts in thousands):
As of December 31, 2020
As of December 31, 2019
Gross Carrying Accumulated Net Carrying Gross Carrying Accumulated Net Carrying
Value
Amortization
Value
Value
Amortization
Value
Domestic servicing rights, at fair
value . . . . . . . . . . . . . . . . . . . . . . . . $
In-place lease intangible assets . . . .
Favorable lease intangible assets . .
Total net intangible assets . . . . . $
— $
13,202 $
133,203
24,181
170,586 $ (100,469) $
(92,540)
(7,929)
13,202 $
40,663
16,252
70,117 $
— $
16,917 $
135,293
24,218
176,428 $ (90,728) $
(84,383)
(6,345)
16,917
50,910
17,873
85,700
The following table summarizes the activity within intangible assets for the years ended December 31, 2020 and
2019 (amounts in thousands):
Balance as of January 1, 2019 . . . . . . . . . . . . . . .
Sale of Ireland Portfolio . . . . . . . . . . . . . .
Sale of certain REIS Equity Portfolio
properties . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of additional REIS Equity
Portfolio property . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss . . . . . . . . . . . . . . . .
Impairment (1) . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value due to changes in
inputs and assumptions . . . . . . . . . . . . . .
Balance as of December 31, 2019 . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value due to changes in
inputs and assumptions . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . .
Domestic
Servicing
Rights
$
20,557
—
In-place Lease
Intangible
Assets
$
97,347
(20,271)
Favorable Lease
Intangible
Assets
$
27,129
(5,654)
$
Total
145,033
(25,925)
—
—
—
—
—
(3,640)
16,917
—
—
(3,715)
13,202
$
$
$
$
(5,208)
277
(19,297)
(806)
(1,132)
—
50,910
(10,077)
(170)
—
40,663
(13)
—
(3,256)
(221)
(112)
—
17,873
(1,621)
—
—
16,252
$
$
(5,221)
277
(22,553)
(1,027)
(1,244)
(3,640)
85,700
(11,698)
(170)
(3,715)
70,117
$
$
(1)
Impairment of intangible lease assets is recognized within other expense in our 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):
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
9,643
7,862
6,115
4,722
3,846
24,727
56,915
146
Lease Liabilities
In connection with our acquisition of certain properties within our Medical Office Portfolio, we recognized
aggregate unfavorable lease liabilities of $4.8 million with a weighted average life of 9.7 years at acquisition. The
liability balance was $1.9 million and $2.3 million as of December 31, 2020 and 2019, respectively.
10. Secured Borrowings
Secured Financing Agreements
The following table is a summary of our secured financing agreements in place as of December 31, 2020 and
2019 (dollars in thousands):
Current
Maturity
Extended
Maturity (a)
Weighted Average
Pricing
Pledged Asset
Carrying Value Facility Size
Maximum
Outstanding Balance at
December 31,
2020
2019
Repurchase Agreements:
Commercial Loans . . . . .
Residential Loans . . . . . .
Infrastructure Loans . . . .
Conduit Loans . . . . . . . .
May 2021 to
Aug 2025
Jun 2022 to
Oct 2023
Feb 2022
Feb 2021 to
Jun 2023
Jan 2021 to
Oct 2030
May 2023 to
(b)
Mar 2029 (b)
(c)
$
7,154,627 $ 8,783,716 (d) $
4,878,939
$ 3,640,620
N/A
N/A
Feb 2022 to
Jun 2024
Dec 2021 to
LIBOR + 2.64%
LIBOR + 2.00%
36,465
278,174
750,000
500,000
22,590
232,961
11,835
188,198
LIBOR + 2.10%
76,613
350,000
53,554
86,575
CMBS/RMBS . . . . . . . .
(e)
Total Repurchase Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Apr 2031 (e)
(f)
1,116,212
8,662,091
770,656
11,154,372
620,763 (g)
5,808,807
682,229
4,609,457
Other Secured Financing:
Borrowing Base Facility . Apr 2022
Commercial Financing
Apr 2024
LIBOR + 2.25%
56,127
650,000 (h)
43,014
198,955
Facility . . . . . . . . . . . Mar 2022
Mar 2029
GBP LIBOR + 1.75%
100,714
81,218
81,218
Residential Financing
Facility . . . . . . . . . . .
Sep 2022
Sep 2025
Infrastructure
Acquisition Facility. . .
Infrastructure Financing
Facilities . . . . . . . . . .
Property Mortgages -
Fixed rate . . . . . . . . . .
Property Mortgages -
Variable rate . . . . . . . .
Sep 2021
Jul 2022 to
Oct 2022
Nov 2024 to
Aug 2052
Nov 2021 to
Jul 2030
Term Loan and
Sep 2022
Oct 2024 to
Jul 2027
3.50%
(i)
298,008
250,000
215,024
575,193
571,690
467,450
603,642
LIBOR +2.06%
663,702
1,250,000
538,645
428,206
(j)
N/A
4.00%
1,280,300
1,077,572
1,077,528
1,196,492
N/A
(k)
938,979
986,200
960,903
696,503
—
—
(l)
Feb 2021
Revolver . . . . . . . . . .
FHLB . . . . . . . . . . . . . .
Total Other Secured Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
765,000
400,000
6,031,680
$ 13,173,141 $ 17,186,052
Unamortized net discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
598,027
4,511,050
(l)
2.06%
N/A
N/A
N/A (l)
645,000
396,000
4,424,782
10,233,589
(13,569)
(73,830)
10,146,190
$
399,000
867,870
4,390,668
9,000,125
(8,347)
(85,730)
$ 8,906,048
(a)
(b)
(c)
(d)
(e)
Subject to certain conditions as defined in the respective facility agreement.
For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such
loan collateral matures, subject to certain specified conditions.
Certain facilities with an outstanding balance of $1.5 billion as of December 31, 2020 are indexed to GBP
LIBOR and EURIBOR. The remainder have a weighted average rate of LIBOR + 2.03%.
The aggregate initial maximum facility size of $8.8 billion may be increased at our option, subject to certain
conditions. This amount includes such upsizes.
Certain facilities with an outstanding balance of $271.0 million as of December 31, 2020 carry a rolling
11-month or 12-month term which may reset monthly or quarterly with the lender's consent. These facilities
carry no maximum facility size.
147
(f)
(g)
(h)
(i)
(j)
(k)
(l)
A facility with an outstanding balance of $212.2 million as of December 31, 2020 has a weighted average fixed
annual interest rate of 3.29%. All other facilities are variable rate with a weighted average rate of LIBOR +
1.80%.
Includes: (i) $212.2 million outstanding on a repurchase facility that is not subject to margin calls; and
(ii) $41.3 million outstanding on one of our repurchase facilities that represents the 49% pro rata share owed by
a non-controlling partner in a consolidated joint venture (see Note 15).
The initial maximum facility size of $300.0 million may be increased to $650.0 million, subject to certain
conditions.
Consists of an annual interest rate of the applicable currency benchmark index + 2.00%.
The weighted average maturity is 6.8 years as of December 31, 2020.
Includes a $600.0 million first mortgage and mezzanine loan secured by our Medical Office Portfolio. This
debt has a weighted average interest rate of LIBOR + 2.07% that we swapped to a fixed rate of 3.34%. The
remainder have a weighted average rate of LIBOR + 2.59%.
Consists of: (i) a $645.0 million term loan facility that matures in July 2026, of which $395.0 million has an
annual interest rate of LIBOR + 2.50% and $250.0 million has an annual interest rate of LIBOR + 3.50%,
subject to a 75 bps LIBOR floor, and (ii) a $120.0 million revolving credit facility that matures in July 2024
with an annual interest rate of LIBOR + 3.00%. These facilities are secured by the equity interests in certain of
our subsidiaries which totaled $4.0 billion as of December 31, 2020.
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 January 2020, we entered into a CMBS/RMBS repurchase facility to finance certain CMBS investments
within a consolidated joint venture in which we hold a 51% ownership interest. The facility carries a rolling 12-month
term which may reset quarterly with the lender’s consent and an annual interest rate of three-month LIBOR + 1.35% to
1.85%. The facility’s maximum facility size is at the discretion of the lender. This facility does not permit valuation
adjustments based on capital markets activity.
In February 2020, we amended a Commercial Loans repurchase facility to increase available borrowings by
$200.0 million to $1.8 billion.
In March 2020, we amended an Infrastructure Financing Facility to increase available borrowings by $250.0
million to $750.0 million.
In March 2020, we entered into a Commercial Financing Facility to finance non-U.S. commercial loans held-
for-investment. The facility carries a two-year initial term with three one-year extension options and includes an option
to extend the maturity for each underlying asset for up to four additional years. The facility has an annual interest rate of
GBP LIBOR + 1.75%. This facility shares up to $500.0 million of $2.0 billion of maximum borrowings with a
Commercial Loans repurchase facility.
During the three months ended June 30, 2020, we entered into mortgage loans with total borrowings of $217.1
million to refinance our Woodstar I Portfolio. The loans carry ten-year terms and weighted average annual interest rates
of LIBOR + 2.71%. A portion of the net proceeds from the mortgage loans was used to repay $117.0 million of
outstanding government sponsored mortgage loans. We recognized a loss on extinguishment of debt of $2.2 million in
our consolidated statement of operations in connection with the repayment of the government sponsored mortgage loans.
In September 2020, we entered into a Residential Loan financing facility to finance residential loans held-for-
sale. The facility carries a two-year initial term with the option to subsequently convert the loan to a three-year term loan.
The facility has a maximum facility size of $250.0 million and an annual interest rate of the greater of 3.50% or one-
month LIBOR + 2.75%. This facility does not permit valuation adjustments based on capital markets activity.
In October 2020, we amended the Term Loan facility to increase borrowings by $250.0 million. This increase to
the Term Loan carries a six-year term and an annual interest rate of LIBOR + 3.50%, subject to a 75 bps LIBOR floor.
148
In October 2020, we entered into a Residential Loans repurchase facility to finance residential loans. The
facility carries a three-year term consisting of an 18-month revolving period and an 18 month extension period and an
annual interest rate of one-month LIBOR + 2.30%. The maximum facility size is $350.0 million.
In October 2020, we entered into a $50.0 million mortgage loan to finance a property in our Commercial and
Residential Lending Segment. The loan carries a three-year term with no prepayment penalty after 12 months or upon
sale of the asset, and an annual interest rate of one-month LIBOR + 2.40%.
During the year ended December 31, 2020, we extended maturities by a period of one to two years on ten
facilities with an aggregate maximum facility size of $6.0 billion, including $4.9 billion related to commercial lending
facilities and $500.0 million related to infrastructure lending facilities.
Our secured financing agreements contain certain financial tests and covenants. As of December 31, 2020, we
were in compliance with all such covenants.
We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit
quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the
majority of our repurchase facilities, consisting of 72% of these agreements, do not permit valuation adjustments based
on capital markets activity Instead, margin calls on these facilities are limited to collateral-specific credit marks. To
monitor credit risk associated with the performance and value of our loans and investments, our asset management team
regularly reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the
collateral and enforcing our rights as necessary. For the 28% of repurchase agreements containing margin call provisions
for general capital markets activity, approximately 15% 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 agreement.
For the years ended December 31, 2020, 2019 and 2018, approximately $36.4 million, $34.3 million and $27.0
million, respectively, of amortization of deferred financing costs from secured financing agreements was included in
interest expense on our consolidated statements of operations.
Collateralized Loan Obligations
In August 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD
2019-FL1. On the closing date, the CLO issued $1.1 billion principal amount of notes, of which $936.4 million was
purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation
preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us
to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the years ended
December 31, 2020 and 2019, we utilized the reinvestment feature, contributing $134.7 million and $88.1 million,
respectively, of additional interests into the CLO.
149
The following table is a summary of our CLO as of December 31, 2020 and 2019 (amounts in thousands):
December 31, 2020
Collateral assets . . . . . . . . . . . .
Financing . . . . . . . . . . . . . . . . .
Count
23 $
1
Face
Amount
1,002,445 $
936,375
Carrying
Value
Weighted
Average Spread
Maturity
1,099,439
930,554
LIBOR + 3.93% (a) Apr 2024 (b)
LIBOR + 1.64% (c) July 2038 (d)
December 31, 2019
Collateral assets . . . . . . . . . . . .
Financing . . . . . . . . . . . . . . . . .
20 $
1
1,073,504 $
936,375
1,073,504
928,060
LIBOR + 3.34% (a) Nov 2023 (b)
LIBOR + 1.65% (c) July 2038 (d)
(a)
(b)
(c)
(d)
Represents the weighted-average coupon earned on variable rate loans during the years ended December 31,
2020 and 2019. Of the loans financed during the years ended December 31, 2020 and 2019, the weighted-
average fixed interest rate earned on fixed-rate loans was 7.07% and 6.84%, respectively. As of December 31,
2020, there were no fixed-rate loans financed by the CLO.
Represents the weighted-average maturity, assuming the extended contractual maturity of the collateral assets.
Represents the weighted-average cost of financing incurred during the years ended December 31, 2020 and
2019, inclusive of deferred issuance costs.
Repayments of the CLO are tied to timing of the related collateral asset repayments. The term of the CLO
financing obligation represents the legal final maturity date.
We incurred $9.2 million of issuance costs in connection with the CLO, which are amortized on an effective
yield basis over the estimated life of the CLO. For the years ended December 31, 2020 and 2019, approximately $2.5
million and $0.9 million, respectively, of amortization of deferred financing costs was included in interest expense on
our consolidated statements of operations. As of December 31, 2020 and 2019, our unamortized issuance costs were $5.8
million and $8.3 million, respectively.
The CLO is considered a VIE, for which we are deemed the primary beneficiary. We therefore consolidate the
CLO. Refer to Note 15 for further discussion.
Maturities
Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if
and when we receive principal payments on, or sell, the investment collateral that we have pledged. The following table
sets forth our principal repayments schedule for secured financings based on the earlier of (i) the extended contractual
maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged
as collateral under the respective credit facility (amounts in thousands):
Repurchase
Agreements
Other Secured
Financing
CLO
Total
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,808,807 $
1,213,850
1,536,451
905,731
1,268,066
227,992
656,717 $
476,484 $
465,487
771,380
299,625
461,967
1,949,839
—
—
—
—
—
936,375 (a)
4,424,782 $ 936,375
$
1,133,201
1,679,337
2,307,831
1,205,356
1,730,033
3,114,206
$ 11,169,964
(a)
Assumes utilization of the reinvestment feature.
150
11. Unsecured Senior Notes
The following table is a summary of our unsecured senior notes outstanding as of December 31, 2020 and 2019
(dollars in thousands):
Remaining
Period of
Amortization
Maturity
Carrying Value at December 31,
Coupon
Rate
Effective
Rate (1)
N/A
Date
2020
N/A N/A
2019
500,000
$
2021 Senior Notes (February) . . . . . . . . . . . . . N/A
700,000
1.0 years
5.32 % 12/15/2021
2021 Senior Notes (December) . . . . . . . . . . . .
5.71 % 11/1/2023 2.8 years
2023 Senior Notes . . . . . . . . . . . . . . . . . . . . . .
—
250,000
2.2 years
4.86 % 4/1/2023
2023 Convertible Notes . . . . . . . . . . . . . . . . . .
500,000
4.2 years
2025 Senior Notes . . . . . . . . . . . . . . . . . . . . . .
5.04 % 3/15/2025
1,950,000
Total principal amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,610)
Unamortized discount—Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,144)
Unamortized discount—Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,624)
Carrying amount of debt components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,732,520 $ 1,928,622
Carrying amount of conversion option equity components recorded in additional
paid-in capital for outstanding convertible notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
700,000
300,000
250,000
500,000
1,750,000
(2,559)
(9,332)
(5,589)
5.00 %
5.50 %
4.38 %
4.75 % (2)
3,755 $
— $
3,755
(1)
(2)
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.
The coupon on the 2025 Notes is 4.75%. At closing, we swapped $470.0 million of the notes to a floating rate
of LIBOR + 2.53%.
Senior Notes Due February 2021
On January 29, 2018, we issued $500.0 million of 3.625% Senior Notes due 2021 (the “2021 February Notes”).
The 2021 February Notes were set to mature on February 1, 2021, however in November 2020, we redeemed all of the
2021 February Notes at a price equal to 100% of the principal amount thereof.
Senior Notes Due December 2021
On December 16, 2016, we issued $700.0 million of 5.00% Senior Notes due 2021 (the “2021
December Notes”). The 2021 December Notes mature on December 15, 2021. Prior to September 15, 2021, we may
redeem some or all of the 2021 December 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 December Notes at a price equal to 100% of the principal amount thereof.
Senior Notes Due November 2023
On November 2, 2020, we issued $300.0 million of 5.50% Senior Notes due 2023 (the “2023 Notes”). The
2023 Notes mature on November 1, 2023. Prior to August 1, 2023, we may redeem some or all of the 2023 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 August 1, 2023, we may redeem some or all of the 2023 Notes at a price equal to 100% of
151
the principal amount thereof. In addition, prior to November 1, 2022, we may redeem up to 40% of the 2023 Notes at a
price equal to 105.5% of the principal amount thereof using the proceeds of certain equity offerings.
Senior Notes Due 2025
On December 4, 2017, we issued $500.0 million of 4.75% Senior Notes due 2025 (the “2025 Notes”). The 2025
Notes mature on March 15, 2025. Prior to September 15, 2024, we may redeem some or all of the 2025 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, 2024, we may redeem some or all of the 2025 Notes at a price equal to 100% of
the principal amount thereof. In addition, prior to March 15, 2021, we may redeem up to 40% of the 2025 Notes at the
applicable redemption price using the proceeds of certain equity offerings. The 2025 Notes were swapped to floating
rate (see Note 13).
Our unsecured senior notes contain certain financial tests and covenants. As of December 31, 2020, we were in
compliance with all such covenants.
Convertible Notes
On March 29, 2017, we issued $250.0 million of 4.375% Convertible Senior Notes due 2023 (the “2023
Convertible Notes”) which remain outstanding at December 31, 2020 and mature on April 1, 2023.
On July 3, 2013, we issued $460.0 million of 4.00% Convertible Senior Notes due 2019 (the “2019 Convertible
Notes”). During the year ended December 31, 2018, we received and settled redemption notices related to the 2019
Convertible Notes with a par amount totaling $263.4 million. Total consideration of $296.8 million was paid via the
issuance of 12.4 million shares and cash payments of $25.5 million. The $264.4 million of settlement consideration
attributable to the liability component of the 2019 Convertible Notes exceeded the proportionate net carrying amount of
the liability component by $2.1 million, which was recognized as a loss on extinguishment of debt in our consolidated
statement of operations for the year ended December 31, 2018. The $32.4 million of settlement consideration attributable
to the equity component of the 2019 Convertible Notes was recognized as a reduction of additional paid-in capital in our
consolidated statement of equity for the year ended December 31, 2018, partially offsetting the $271.2 million fair value
of the shares issued. During the year ended December 31, 2019, we settled the remaining $78.0 million principal amount
of the 2019 Convertible Notes through the issuance of 3.6 million shares of common stock and cash payments of $12.0
million.
We recognized interest expense of $12.2 million, $12.3 million and $28.9 million during the years ended
December 31, 2020, 2019 and 2018, respectively, from our Convertible Notes.
The following table details the conversion attributes of our Convertible Notes outstanding as of December 31,
2020 (amounts in thousands, except rates):
December 31, 2020
Conversion Conversion
Rate (1)
Price (2)
Conversion Spread Value - Shares (3)
For the Year Ended December 31,
2019
2020
2018
2019 Convertible Notes . . . .
2023 Convertible Notes . . . .
N/A
38.5959 $
N/A
25.91
—
—
—
—
91
—
(1)
(2)
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 of December 31, 2020, 2019 and 2018, the market price of the Company’s common stock was $19.30,
$24.86 and $19.71 per share, respectively.
152
(3)
The conversion spread value represents the portion of the Convertible Notes that are “in-the-money”,
representing the value that would be delivered to investors in shares upon an assumed conversion.
The if - converted value of the 2023 Notes was less than their principal amount by $63.8 million at December 31,
2020 as the closing market price of the Company’s common stock of $19.30 was less than the implicit conversion price
of $25.91 per share.
Effective June 30, 2018, the Company no longer asserts its intent to fully settle the principal amount of the
Convertible Notes in cash upon conversion. The if-converted value of the principal amount of the 2023 Notes was
$186.2 million as of December 31, 2020.
Conditions for Conversion
Prior to October 1, 2022, the 2023 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% of the conversion
price of the 2023 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 2023 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.
On or after October 1, 2022, holders of the 2023 Notes may convert each of their 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.
12. Loan Securitization/Sale Activities
As described below, we regularly sell loans and notes under various strategies. We evaluate such sales as to
whether they meet the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the
transferred assets without constraint and transfer of control.
Loan Securitizations
Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell
these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in
part by these assets, as well as other assets transferred to the VIE by third parties. Within the Commercial and
Residential Lending Segment, we acquire residential loans with the intent to sell these mortgage loans to VIEs for the
purpose of securitization. These VIEs then issue RMBS that are collateralized by these assets.
In certain instances, we retain an interest in the CMBS or RMBS VIE and serve as special servicer or servicing
administrator for the VIE. In these circumstances, we generally consolidate the VIE into which the loans were sold. The
securitizations are subject to optional redemption after a certain period of time or when the pool balance falls below a
specified threshold. During the year ended December 31, 2020, we exercised the optional redemption on our first
residential securitization that closed in 2018. In doing so, we acquired $176.6 million of loans and redeemed $10.5
million of our existing RMBS holdings. The net amount paid to a consolidated VIE to redeem the outstanding principal
amount of its RMBS certificates and acquire the underlying loans pursuant to this provision are reflected as repayment of
debt of consolidated VIEs in our consolidated statements of cash flows.
153
The following summarizes the face amount and proceeds of commercial and residential loans securitized for the
years ended December 31, 2020, 2019 and 2018 (amounts in thousands):
For the Year Ended December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
920,282
1,781,981
1,517,599
$
975,569
1,845,890
1,563,433
$
1,770,513
1,256,481
654,017
$
1,826,549
1,305,059
676,484
Commercial Loans
Residential Loans
Face Amount
Proceeds
Face Amount
Proceeds
The securitization of these commercial and residential loans does not result in a discrete gain or loss since they
are carried under the fair value option.
Our securitizations have each been structured as bankruptcy-remote entities whose assets are not intended to be
available to the creditors of any other party.
Commercial and Residential Loan Sales
Within the Commercial and Residential Lending Segment, we originate or acquire commercial mortgage loans,
subsequently selling all or a portion thereof. Typically, our motivation for entering into these transactions is to
effectively create leverage on the subordinated position that we will retain and hold for investment. We also may sell
certain of our previously-acquired residential loans to third parties outside a securitization. The following table
summarizes our loans sold by the Commercial and Residential Lending Segment, net of expenses (amounts in
thousands):
Loan Transfers Accounted for as Sales
Commercial
Residential
For the Year Ended December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Face Amount (1) Proceeds (1) Face Amount Proceeds
446,132 $ 442,833 $
751,210
840,400
748,045
835,849
550 $
26,046
6,848
604
26,797
7,072
(1)
During the year ended December 31, 2020, we sold $277.9 million and $168.2 million of senior interests in first
mortgage loans and whole loan interests, respectively, for proceeds of $270.8 million and $172.0 million,
respectively. During the years ended December 31, 2019 and 2018, all sales were of senior interests in first
mortgage loans.
During the years ended December 31, 2020 and 2019, (losses)/gains recognized by the Commercial and
Residential Lending Segment on sales of commercial loans were losses of $1.0 million and gains of $4.6 million,
respectively. During the year ended December 31, 2018, gains recognized by the Commercial and Residential Lending
Segment on sales of commercial loans were not material.
Infrastructure Loan Sales
During the year ended December 31, 2020, the Infrastructure Lending Segment sold loans held-for-sale with an
aggregate face amount of $61.1 million for proceeds of $60.8 million, recognizing gains of $0.3 million. During the year
ended December 31, 2019, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of
$404.1 million for proceeds of $393.3 million, recognizing gains of $3.1 million. In connection with these sales, we sold
an interest rate swap guarantee for cash payment of $3.1 million and recognized a decrease in fair value of $2.7 million
within (loss) gain on derivative financial instruments, net in our consolidated statement of operations during the year
ended December 31, 2019. Refer to Note 13 for further discussion of our interest rate swap guarantees. There were no
sales of loans by the Infrastructure Lending Segment during the year ended December 31, 2018.
154
13. 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. We
principally manage our exposures to a wide variety of business and operational risks through management of our core
business activities. We manage economic risks, including interest rate, foreign exchange, liquidity and credit risk
primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial
instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business
activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are
determined by interest rates, credit spreads, and foreign exchange rates. Our derivative financial instruments are used to
manage differences in the amount, timing and duration of the known or expected cash receipts and known or expected
cash payments principally related to our investments, anticipated level of loan sales, and borrowings.
Designated Hedges
The Company does not generally elect to apply the hedge accounting designation to its hedging instruments. As
of December 31, 2020 and 2019, the Company did not have any designated hedges and there was no impact of cash flow
hedges on our net income during the years ended December 31, 2020 and 2019. During the year ended December 31,
2018, the impact of cash flow hedges on our net income was not material, and we did not recognize any hedge
ineffectiveness in earnings associated with cash flow hedges.
Non - designated Hedges and Derivatives
Derivatives not designated as hedges are derivatives that do not meet the criteria for hedge accounting under
GAAP or which we have not elected to designate as hedges. We do not use these derivatives for speculative purposes but
instead they are used to manage our exposure to various risks such as foreign exchange rates, interest rate changes and
certain credit spreads. Changes in the fair value of derivatives not designated in hedging relationships are recorded
directly in gain (loss) on derivative financial instruments in our consolidated statements of operations.
We have entered into the following types of non-designated hedges and derivatives:
• Foreign exchange (“Fx”) forwards whereby we agree to buy or sell a specified amount of foreign currency for a
specified amount of USD at a future date, economically fixing the USD amounts of foreign denominated cash
flows we expect to receive or pay related to certain foreign denominated loan investments and properties;
Interest rate contracts which hedge a portion of our exposure to changes in interest rates;
•
• Credit index instruments which hedge a portion of our exposure to the credit risk of our commercial loans held-
•
for-sale; and
Interest rate swap guarantees whereby we guarantee the interest rate swap obligations of certain Infrastructure
Lending borrowers. Our interest rate swap guarantees were assumed in connection with the acquisition of the
Infrastructure Lending Segment.
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The following table summarizes our non-designated derivatives as of December 31, 2020 (notional amounts in
thousands):
Type of Derivative
Fx contracts – Buy Euros ("EUR") . . . . . . . . . . .
Fx contracts – Buy Pounds Sterling ("GBP") . . .
Fx contracts – Sell EUR . . . . . . . . . . . . . . . . . . . .
Fx contracts – Sell GBP . . . . . . . . . . . . . . . . . . . .
Fx contracts – Sell Australian dollar ("AUD") . .
Interest rate swaps – Paying fixed rates . . . . . . . .
Interest rate swaps – Receiving fixed rates . . . . .
Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit index instruments . . . . . . . . . . . . . . . . . . . .
Interest rate swap guarantees . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Contracts
Aggregate
Notional
Amount
1,915
1,602
254,243
431,836
165,200
1,707,557
470,000
991,354
69,000
378,757
1
1
256
149
16
34
1
22
4
6
490
Notional
Maturity
Currency
November 2022
EUR
January 2021
GBP
January 2021-November 2025
EUR
January 2021 - May 2024
GBP
AUD
August 2021 – June 2022
USD May 2023 – January 2031
USD
USD
USD September 2058 – August 2061
USD
March 2025
March 2021 – April 2025
March 2022 – June 2025
The table below presents the fair value of our derivative financial instruments as well as their classification on
the consolidated balance sheets as of December 31, 2020 and 2019 (amounts in thousands):
Interest rate contracts . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate swap guarantees . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . .
Credit index instruments . . . . . . . . . . . . . . . . . . . . . . .
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value of Derivatives
in an Asset Position (1)
as of December 31,
Fair Value of Derivatives
in a Liability Position (2)
as of December 31,
2020
33,841
—
6,585
129
40,555
$
$
2019
14,385
—
14,558
—
28,943
2020
4
849
39,951
520
41,324
$
2019
—
614
7,834
292
8,740
$
(1)
(2)
Classified as derivative assets in our consolidated balance sheets.
Classified as derivative liabilities in our consolidated balance sheets.
The tables below present the effect of our derivative financial instruments on the consolidated statements of
operations and of comprehensive income for the years ended December 31, 2020, 2019 and 2018 (amounts in
thousands):
a
Derivatives Not Designated
as Hedging Instruments
Interest rate contracts . . . . . . .
Interest rate swap guarantees . .
Foreign exchange contracts . .
Credit index instruments . . . . .
Amount of Gain (Loss)
Recognized in Income for the
Year Ended December 31,
2019
2020
Location of Gain (Loss)
Recognized in Income
(Loss) gain on derivative financial instruments $ (48,692) $ (10,516)
(3,350)
(Loss) gain on derivative financial instruments
(Loss) gain on derivative financial instruments
8,801
(1,245)
(Loss) gain on derivative financial instruments
$ (82,178) $ (6,310)
(235)
(32,561)
(690)
$
2018
(1,593)
(114)
36,040
270
$ 34,603
Derivatives Designated as Hedging Instruments
For the Year Ended December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gain
Recognized
in OCI
Gain
Reclassified
from AOCI
into Income
Gain Recognized
in Income
Location of Gain
(effective portion) (effective portion) (ineffective portion) Recognized in Income
— $
— $
33 $
— Interest expense
— Interest expense
— Interest expense
— $
— $
8 $
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14. 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
(i)
Gross Amounts
Recognized
(ii)
(iii) = (i) - (ii)
Gross Amounts Net Amounts
Presented in
Offset in the
the Statement of
Statement of
Financial Position Financial Position
of Financial Position
Cash
Collateral
Received / (v) = (iii) - (iv)
Net Amount
Pledged
Financial
Instruments
As of December 31, 2020
Derivative assets . . . . . . . . . . $
Derivative liabilities . . . . . . . $
Repurchase agreements . . . .
40,555 $
41,324 $
5,808,807
$ 5,850,131 $
As of December 31, 2019
Derivative assets . . . . . . . . . . $
Derivative liabilities . . . . . . . $
Repurchase agreements . . . .
28,943 $
8,740 $
4,609,457
$ 4,618,197 $
— $
— $
—
— $
— $
— $
—
— $
40,555 $
41,324 $
6,716 $ 33,772 $
6,716 $ 27,416 $
5,808,807
5,808,807
5,850,131 $ 5,815,523 $ 27,416 $
—
28,943 $
8,740 $
4,609,457
4,618,197 $ 4,614,769 $
4,609,457
5,312 $ 14,208 $
292 $
5,312 $
—
292 $
67
7,192
—
7,192
9,423
3,136
—
3,136
15. Variable Interest Entities
Investment Securities
As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation,
including our investments in CMBS, RMBS and our retained interests in securitization transactions we initiated, all of
which are generally considered to be variable interests in VIEs.
Securitization VIEs consolidated in accordance with ASC 810 are structured as pass through entities that
receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The
assets and other instruments held by these securitization entities are restricted and can only be used to fulfill the
obligations of the entity. Additionally, the obligations of the securitization entities do not have any recourse to the
general credit of any other consolidated entities, nor to us as the primary beneficiary. The VIE liabilities initially
represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our
associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we
earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the
consolidated VIEs are also eliminated. Finally, a 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.
During the year ended December 31, 2019, we refinanced a pool of our commercial loans held-for-investment
through a CLO, which is considered to be a VIE. We are the primary beneficiary of, and therefore consolidate, the CLO
in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager that
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most significantly impact the CLO’s economic performance, and (ii) the obligation to absorb losses and the right to
receive benefits from the CLO that could be potentially significant through the subordinate interests we own.
The following table details the assets and liabilities of our consolidated CLO as of December 31, 2020 and 2019
(amounts in thousands):
Assets:
December 31, 2020 December 31, 2019
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Liabilities
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . $
Collateralized loan obligations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
96,998 $
1,002,441
5,454
557
1,105,450 $
—
1,073,504
3,129
26,496
1,103,129
663 $
930,554
931,217 $
1,362
928,060
929,422
Assets held by this CLO are restricted and can be used only to settle obligations of the CLO, including the
subordinate interests owned by us. The liabilities of this CLO are non-recourse to us and can only be satisfied from the
assets of the CLO.
We also hold controlling interests in other non-securitization entities that are considered VIEs. SPT Dolphin,
the entity which holds the Woodstar II Portfolio, is a VIE because the third party interest holders do not carry kick-out
rights or substantive participating rights. We were deemed to be the primary beneficiary of the VIE because we possess
both the power to direct the activities of the VIE that most significantly impact its economic performance and a
significant economic interest in the entity. This VIE had total assets of $673.0 million and liabilities of $444.3 million as
of December 31, 2020.
In December 2019, we entered into a newly-formed joint venture (the “CMBS JV”) within our Investing and
Servicing Segment, which is considered a VIE because the third party interest holder does not carry kick-out rights or
substantive participating rights. We hold a 51% ownership interest and are deemed the primary beneficiary of the
CMBS JV. This VIE had total assets of $330.0 million and liabilities of $85.0 million as of December 31, 2020. Refer
to Note 17 for further discussion.
In addition to the above non-securitization entities, we have smaller VIEs with total assets of $99.6 million and
liabilities of $53.6 million as of December 31, 2020.
VIEs in which we are not the Primary Beneficiary
In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not
appointed, or do not serve as, special servicer or servicing administrator or (ii) an unrelated third party has the rights to
unilaterally remove us as special servicer without cause. In these instances, we do not have the power to direct activities
that most significantly impact the VIE’s economic performance. In other cases, the variable interest we hold does not
obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be
significant. For these structures, we are not deemed to be the primary beneficiary of the VIE, and we do not consolidate
these VIEs.
As of December 31, 2020, five of our six collateralized debt obligation (“CDO”) structures within our Investing
and Servicing Segment were in default or imminent default, which, pursuant to the underlying indentures, changes the
rights of the variable interest holders. Two of the five CDOs defaulted during the year ended December 31, 2020. Upon
default of a CDO, 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.
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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. As of December 31, 2020, none
of these five CDO structures were consolidated.
As noted above, we are not obligated to provide, nor have we provided, any financial support for any of our
securitization VIEs, whether or not we are deemed to be the primary beneficiary. As such, the risk associated with our
involvement in these VIEs is limited to the carrying value of our investment in the entity. As of December 31, 2020, our
maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $19.5 million on a
fair value basis.
As of December 31, 2020, the securitization VIEs which we do not consolidate had debt obligations to
beneficial interest holders with unpaid principal balances, excluding the notional value of interest-only securities, of
$4.0 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 $25.1 million as
of December 31, 2020, within investment in unconsolidated entities on our consolidated balance sheet. Our maximum
risk of loss is limited to our carrying value of the investments.
16. 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.
Base Management Fee. The base management fee is 1.5% of our stockholders’ equity per annum and
calculated and payable quarterly in arrears in cash. For purposes of calculating the management fee, our stockholders’
equity means: (a) the sum of (1) the net proceeds from all issuances of our equity securities since inception and equity
securities of subsidiaries issued in exchange for properties (allocated on a pro rata daily basis for such issuances during
the fiscal quarter of any such issuance), plus (2) our retained earnings and income to non-controlling interests with
respect to equity securities of subsidiaries issued in exchange for properties at the end of the most recently completed
calendar quarter (without taking into account any non - cash equity compensation expense incurred in current or prior
periods), less (b) any amount that we pay to repurchase our common stock since inception. It also excludes (1) any
unrealized gains and losses and other non - cash items that have impacted stockholders’ equity as reported in our financial
statements prepared in accordance with GAAP, and (2) one - time events pursuant to changes in GAAP, and certain
non - cash items not otherwise described above, in each case after discussions between our Manager and our independent
directors and approval by a majority of our independent directors. As a result, our stockholders’ equity, for purposes of
calculating the management fee, could be greater or less than the amount of stockholders’ equity shown in our
consolidated financial statements.
For the years ended December 31, 2020, 2019 and 2018, approximately $76.6 million, $77.0 million and
$73.2 million, respectively, was incurred for base management fees. In April 2020, our board of directors authorized the
payment of our first quarter base management fee of $19.1 million in 1,422,143 shares of our common stock. As of
December 31, 2020 and 2019, there were $19.2 million and $19.3 million, respectively, of unpaid base management fees
included in related-party payable in our consolidated balance sheets.
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Incentive Fee. Our Manager is entitled to be paid the incentive fee described below with respect to each
calendar quarter if (1) our Core Earnings (as defined below) for the previous 12 - month period exceeds an 8% threshold,
and (2) our Core Earnings for the 12 most recently completed calendar quarters is greater than zero.
The incentive fee is an amount, not less than zero, equal to the difference between (1) the product of (x) 20%
and (y) the difference between (i) our Core Earnings for the previous 12-month period, and (ii) the product of (A) the
weighted average of the issue price per share of our common stock of all of our public offerings and including issue price
per equity security of subsidiaries issued in exchange for properties multiplied by the weighted average number of all
shares of common stock outstanding (including any RSUs, any RSAs and other shares of common stock underlying
awards granted under our equity incentive plans) and equity securities of subsidiaries issued in exchange for properties in
such previous 12-month period, and (B) 8%, and (2) the sum of any incentive fee paid to our Manager with respect to the
first three calendar quarters of such previous 12-month period. One half of each quarterly installment of the incentive fee
is payable in shares of our common stock so long as the ownership of such additional number of shares by our Manager
would not violate the 9.8% stock ownership limit set forth in our charter, after giving effect to any waiver from such
limit that our board of directors may grant in the future. The remainder of the incentive fee is payable in cash. The
number of shares to be issued to our Manager is equal to the dollar amount of the portion of the quarterly installment of
the incentive fee payable in shares divided by the average of the closing prices of our common stock on the NYSE for
the five trading days prior to the date on which such quarterly installment is paid.
Core Earnings is defined as GAAP net income (loss) excluding non-cash equity compensation expense, the
incentive fee, depreciation and amortization of real estate and associated intangibles, acquisition costs associated with
successful acquisitions, any unrealized gains, losses or other non-cash items recorded in net income for the period,
regardless of whether such items are included in OCI, or in net income and, to the extent deducted from net income
(loss), distributions payable with respect to equity securities of subsidiaries issued in exchange for properties. The
amount is adjusted to exclude one-time events pursuant to changes in GAAP and certain other non-cash adjustments as
determined by our Manager and approved by a majority of our independent directors.
For the years ended December 31, 2020, 2019 and 2018, approximately $30.8 million, $20.2 million and
$41.4 million, respectively, was incurred for incentive fees. As of December 31, 2020 and 2019, there were $15.0
million and $18.1 million, respectively, of unpaid incentive fees included in related - party payable in our consolidated
balance sheets.
Expense Reimbursement. We are required to reimburse our Manager for operating expenses incurred by our
Manager on our behalf. In addition, pursuant to the terms of the Management Agreement, we are required to reimburse
our Manager for the cost of legal, tax, consulting, accounting and other similar services rendered for us by our Manager’s
personnel provided that such costs are no greater than those that would be payable if the services were provided by an
independent third party. The expense reimbursement is not subject to any dollar limitations but is subject to review by
our independent directors. For the years ended December 31, 2020, 2019 and 2018, approximately $8.5 million,
$7.7 million and $7.7 million, respectively, was incurred for executive compensation and other reimbursable expenses
and recognized within general and administrative expenses in our consolidated statements of operations. As of
December 31, 2020 and 2019, there were $5.0 million and $3.5 million, respectively, of unpaid reimbursable executive
compensation and other expenses included in related - party payable in our 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 years ended December 31, 2020, 2019 and 2018, we granted 341,635, 182,861 and
252,375 RSAs, respectively, at grant date fair values of $3.9 million, $4.1 million and $5.3 million, respectively.
Expenses related to the vesting of awards to employees of affiliates of our Manager were $3.4 million, $4.1 million and
$2.9 million during the years ended December 31, 2020, 2019 and 2018, respectively, and are reflected in general and
administrative expenses in our consolidated statements of operations. These shares generally vest over a three-year
period.
Payments to Manager Employees. During the year ended December 31, 2018, we made a cash payment of $1.3
million directly to an employee of our Manager in connection with the Company’s Infrastructure Lending Segment
acquisition which was recognized within general and administrative expenses in our consolidated statement of operations
160
for that year. No cash payments were made directly to employees of our Manager during the years ended December 31,
2020 and 2019.
Termination Fee. We can terminate the Management Agreement without cause, as defined in the Management
Agreement, with an affirmative two-thirds vote by our independent directors and 180 days written notice to our
Manager. Upon termination without cause, our Manager is due a termination fee equal to three times the sum of the
average annual base management fee and incentive fee earned by our Manager over the preceding eight calendar
quarters. No termination fee is payable if our Manager is terminated for cause, as defined in the Management
Agreement, which can be done at any time with 30 days written notice from our board of directors.
Manager Equity Plan
In May 2017, the Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager Equity
Plan (the “2017 Manager Equity Plan”), which replaced the Starwood Property Trust, Inc. Manager Equity Plan
(“Manager Equity Plan”). In November 2020, we granted 1,800,000 RSUs to our Manager under the 2017 Manager
Equity Plan. In September 2019, we granted 1,200,000 RSUs to our Manager under the 2017 Manager Equity Plan. In
April 2018, we granted 775,000 RSUs to our Manager under the 2017 Manager Equity Plan. In March 2017, we granted
1,000,000 RSUs to our Manager under the Manager Equity Plan. In 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 $18.0 million, $20.2 million and $12.6 million within management fees in our
consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018, respectively. Refer to
Note 17 for further discussion of these grants.
Investments in Loans and Securities
In August 2020, the Company received a $245.0 million partial repayment on a $339.2 million first mortgage
and mezzanine loan that was originated in August 2017 related to an office campus located in Irvine, California. An
affiliate of our Manager has a non-controlling equity interest in the borrower. As of December 31, 2020, the outstanding
balance of this loan was $29.4 million.
In March 2020, a £75.0 million first mortgage that was co-originated with SEREF in June 2016 for the
development of a three-property mixed use portfolio located in Greater London was paid off in full.
In January 2020, the Company originated a $3.5 million bridge loan to a third party borrower for the
development and recapitalization of luxury cabin rentals. In February 2020, the bridge loan was repaid, and the
Company originated a $99.0 million first mortgage loan to the same borrower. The loan bears interest at a fixed rate of
10.5% plus fees and contains a term of 36 months with two one-year extension options. Certain members of our
executive team and board of directors own equity interests in the borrower. As of December 31, 2020, the outstanding
balance of this loan was $45.3 million.
In January 2020, the Company co-originated a €70.3 million mezzanine loan with SEREF, an affiliate of our
Manager, to the third party that acquired our property portfolio in Ireland in December 2019. The Company and SEREF
each originated €35.2 million and the loan matures in October 2025. As of December 31, 2020, the full amount of this
loan was outstanding.
During the years ended December 31, 2020, 2019 and 2018, the Company acquired $244.4 million, $353.0
million and $135.6 million, respectively, of loans from a residential mortgage originator in which it holds an equity
interest. In September 2020, the Company amended a $4.5 million subordinated loan to this residential mortgage
originator, which was entered into in June 2018, to extend the maturity from September 2020 to September 2021. Such
loan had been amended in September and October 2019 to extend the maturity from September 2019 to September 2020
and increase the total commitment from $2.0 million to $4.5 million. Refer to Note 8 for further discussion.
161
In November 2019, the Company and SEREF, an affiliate of our Manager, each originated €39.0 million of a
€192.0 million first mortgage and subordinated loan. The loan was to a third party borrower for the acquisition of an
office portfolio located in Spain. The loan matures in November 2023. In December 2019, we sold the first mortgage of
€15.0 million and as of December 31, 2020, the outstanding balance of this loan was €21.3 million.
In September 2019, the Company co-originated a €73.6 million first mortgage loan with SEREF, an affiliate of
our Manager. The loan was to a third party borrower for the development of a Grade A office building and convention
center in Dublin, Ireland. The Company originated €58.9 million of the loan and SEREF originated €14.7 million. The
loan matures in May 2022. As of December 31, 2020, the outstanding balance of this loan was €14.2 million.
In February 2019, the Company acquired a $60.0 million participation in a $925.0 million first priority
infrastructure term loan. In April 2019 and July 2019, the Company acquired participations of $5.0 million and $16.0
million, respectively, in a $350.0 million upsize to the term loan. The loan is secured by five domestic natural gas power
plants. An affiliate of our Manager, Starwood Energy Group, is the borrower under the term loan. As of December 31,
2020, the outstanding participation balance in this term loan was $78.3 million.
In March 2019, the Company originated a $22.5 million loan to refinance the debt of a commercial real estate
partnership in which we hold a 50% equity interest.
In December 2018, the Company co-originated a £62.5 million mezzanine loan for the development of a
residential and hotel property located in Central London with SEREF, an affiliate of our Manager. We originated £21.3
million of the loan and SEREF originated £41.2 million. The loan matures in December 2021. As of December 31,
2020, the outstanding balance of this loan was £20.6 million
In June 2018, a subordinate CMBS investment in a securitization issued by an affiliate of our Manager was paid
off in full. We acquired the security, which was secured by five regional malls in Ohio, California and Washington, for
$84.1 million in December 2013. In January 2016, we acquired an additional $9.7 million of this subordinate CMBS
investment.
In March 2018, the Company acquired a €55.0 million newly-originated loan participation from SEREF, which
is secured by a luxury resort in Estepona, Spain. The loan matures in March 2023. As of December 31, 2020, the
outstanding balance of this loan was €52.8 million.
In February 2018, a GBP denominated first mortgage loan that we had co-originated with SEREF in
November 2013, which was secured by Centre Point, an iconic tower located in Central London, England, was repaid in
full.
In January 2018, the Company acquired a $130.0 million first mortgage participation from an unaffiliated third
party. The loan is secured by four U.S. power plants that each have long-term power purchase agreements with
investment grade counterparties. The borrower is an affiliate of our Manager. As of December 31, 2020, the outstanding
balance of this loan was $64.1 million.
In December 2012, the Company acquired 9,140,000 ordinary shares in SEREF, a debt fund that is externally
managed by an affiliate of our Manager and is listed on the London Stock Exchange, for approximately $14.7 million,
which equated to approximately 4% ownership of SEREF. As of December 31, 2020, our shares represent an
approximate 2% interest in SEREF. Refer to Note 6 for additional details.
Investment in Unconsolidated Entities
In October 2014, we committed $150 million for a 33% equity interest in four regional shopping malls (the
“Retail Fund”). In August 2017, we funded the remaining $15.5 million capital commitment associated with this
investment. During the years ended December 31, 2019 and 2018, we recognized a loss of $114.4 million and earnings
of $3.7 million, respectively. No earnings or losses were recognized during the year ended December 31, 2020. During
the period included in our year ended December 31, 2019, the Retail Fund reported unrealized decreases in the fair value
of its real estate properties, which resulted in a $47.2 million decrease to our investment. In addition, we provided an
162
impairment charge of $71.9 million against the remainder of the investment based on our estimate of the fair value of the
underlying retail assets as of December 31, 2019. Refer to Note 8 for further detail. The Retail Fund was established for
the purpose of acquiring and operating four leading regional shopping malls located in Florida, Michigan, North Carolina
and Virginia. All leasing services and asset management functions for the properties are conducted by an affiliate of our
Manager which specializes in redeveloping, managing and repositioning retail real estate assets. In addition, another
affiliate of our Manager serves as general partner of the Retail Fund.
In April 2013, in connection with our acquisition of LNR, we acquired 50% of a joint venture which owns
equity in an online real estate company. An affiliate of ours, Fund IX, owns the remaining 50% of the venture.
Lease Arrangements
In March 2020, we entered into an office lease agreement with an entity which is controlled by our Chairman
and CEO through majority equity ownership of the entity. The leased premises are currently under construction and will
serve as our new Miami Beach office when our existing lease in Miami Beach expires on December 31, 2021. The lease
will commence after delivery of the office space to us, but no earlier than July 30, 2021. The lease is for approximately
74,000 square feet of office space, has an initial term of 15 years and requires monthly lease payments starting in the
tenth month after lease commencement. The lease payments are based on an annual base rate of $52.00 per square foot
that increases by 3% each anniversary following commencement, plus our pro rata share of building operating expenses.
In April 2020, we provided a $1.9 million cash security deposit to the landlord. Prior to the execution of this lease, we
engaged an independent third party leasing firm and external counsel to advise the independent directors of our board of
directors on market terms for the lease. The terms of the lease were approved by our independent directors.
Acquisitions from Consolidated CMBS Trusts
Our Investing and Servicing Segment acquires interests in properties for its REIS Equity Portfolio from CMBS
trusts, some of which are consolidated as VIEs on our balance sheet. Acquisitions from consolidated VIEs are reflected
as repayment of debt of consolidated VIEs in our consolidated statements of cash flows. During the years ended
December 31, 2019 and 2018, we acquired $8.6 million and $27.7 million, respectively, of net real estate assets from
consolidated CMBS trusts for a total gross purchase price of $8.8 million and $28.0 million, respectively. There were no
net real estate assets acquired from consolidated CMBS trusts during the year ended December 31, 2020. Refer to Note 3
for further discussion of these acquisitions.
Acquisitions from Consolidated RMBS Trusts
When our Commercial and Residential Lending Segment exercises an optional redemption right in a
securitization VIE, it unwinds the securitization structure and acquires the underlying loans from the VIE. Acquisitions
of loans from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our consolidated statements
of cash flows. During the year ended December 31, 2020, we acquired $176.6 million of residential loans from
consolidated RMBS trusts at their par amounts. Refer to Note 12 for further discussion of these acquisitions.
Other Related-Party Arrangements
During the year ended December 31, 2016, we established a co-investment fund which provides key personnel
with the opportunity to invest in certain properties included in our REIS Equity Portfolio. These personnel include
certain of our employees as well as employees of affiliates of our Manager (collectively, “Fund Participants”). The fund
carries an aggregate commitment of $15.0 million and owns a 10% equity interest in certain REIS Equity Portfolio
properties acquired subsequent to January 1, 2015. As of December 31, 2020, Fund Participants have funded $4.9
million of the capital commitment, and it is our current expectation that there will be no additional funding of the
commitment. The capital contributed by Fund Participants is reflected on our consolidated balance sheets as non-
controlling interests in consolidated subsidiaries. In an effort to retain key personnel, the fund provides for
disproportionate distributions which allows Fund Participants to earn an incremental 60% on all operating cash flows
attributable to their capital account, net of a 5% preferred return to us as general partner of the fund. Amounts earned by
Fund Participants pursuant to this waterfall are reflected within net income attributable to non-controlling interests in our
163
consolidated statements of operations. During the years ended December 31, 2020, 2019 and 2018, the non-controlling
interests related to this fund received cash distributions of $1.8 million, $1.3 million and $2.0 million, respectively.
Highmark Residential (“Highmark”), an affiliate of our Manager, now provides property management services
for all 32 properties within our Woodstar I Portfolio. Fees paid to Highmark are calculated as a percentage of gross
receipts and are at market terms. During the years ended December 31, 2020, 2019 and 2018, property management fees
to Highmark of $2.1 million, $1.6 million and $0.1 million, respectively, were recognized in our consolidated statements
of operations.
17. Stockholders’ Equity and Non-Controlling Interests
The Company’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.01 par value per
share, and 500,000,000 shares of common stock, $0.01 par value per share.
In May 2014, we established the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock
Purchase Plan (the “DRIP Plan”), which provides stockholders with a means of purchasing additional shares of our
common stock by reinvesting the cash dividends paid on our common stock and by making additional optional cash
purchases. Shares of our common stock purchased under the DRIP Plan will either be issued directly by the Company or
purchased in the open market by the plan administrator. The Company may issue up to 11.0 million shares of common
stock under the DRIP Plan. During the years ended December 31, 2020, 2019 and 2018, shares issued under the DRIP
Plan were not material.
In May 2014, we entered into an amended and restated At-The-Market Equity Offering Sales Agreement (the
“ATM Agreement”) with Merrill Lynch, Pierce, Fenner & Smith Incorporated to sell shares of the Company’s common
stock of up to $500.0 million from time to time, through an “at the market” equity offering program. Sales of shares
under the ATM Agreement are made by means of ordinary brokers’ transactions on the NYSE or otherwise at market
prices prevailing at the time of sale or at negotiated prices. During the years ended December 31, 2020, 2019 and 2018,
there were no shares issued under the ATM Agreement.
In February 2020, our board of directors authorized the repurchase of up to $400.0 million of our outstanding
common shares and Convertible Notes over a period of one year. Purchases made pursuant to the program will be made
either in 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 year ended December 31, 2020, we repurchased 2,268,551
shares of common stock for $33.8 million and no Convertible Notes under our repurchase program. As of December 31,
2020, we had $366.2 million of remaining capacity to repurchase common stock and/or Convertible Notes under the
repurchase program. During the year ended December 31, 2018, we repurchased 573,255 shares of common stock for
$12.1 million and no Convertible Notes repurchases under a previous repurchase program which expired in
January 2019.
During the years ended December 31, 2019 and 2018, we issued 3.6 million shares and 12.4 million shares,
respectively, in connection with the settlement of $78.0 million and $263.4 million, respectively, of our 2019
Convertible Notes. Refer to Note 11 for further discussion.
164
Our board of directors declared the following dividends during the years ended December 31, 2020, 2019 and
2018:
12/31/20
9/30/20
6/30/20
3/31/20
Declaration Date
12/9/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9/16/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6/16/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2/25/20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11/8/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12/31/19
8/7/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9/30/19
5/8/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6/28/19
2/28/19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3/29/19
11/9/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12/31/18
8/8/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9/28/18
5/4/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6/29/18
2/28/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Record Date Ex-Dividend Date Payment Date Amount Frequency
$ 0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
Quarterly
0.48
0.48
Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
Quarterly
0.48
Quarterly
0.48
0.48 Quarterly
1/15/21
10/15/20
7/15/20
4/15/20
1/15/20
10/15/19
7/15/19
4/15/19
1/15/19
10/15/18
7/13/18
4/13/18
12/30/20
9/29/20
6/29/20
3/30/20
12/30/19
9/27/19
6/27/19
3/28/19
12/28/18
9/27/18
6/28/18
3/28/18
3/30/18
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”). As of December 31, 2020, 4,709,531 share awards were available to be
issued under either the 2017 Manager Equity Plan or the 2017 Equity Plan, determined on a combined basis.
To date, we have only granted RSAs and RSUs under the equity incentive plans. The holders of awards of
RSAs or RSUs are entitled to receive dividends or “distribution equivalents” beginning on either the award’s effective
date or vest date, depending on the terms of the award.
The table below summarizes our share awards granted or vested under the Manager Equity Plan and the 2017
Manager Equity Plan during the years ended December 31, 2020, 2019 and 2018 (dollar amounts in thousands):
Grant Date
November 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
September 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
April 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
March 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
May 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
1,800,000 $
1,200,000
775,000
1,000,000
675,000
30,078
29,484
16,329
22,240
16,511
3 years
(1)
3 years
3 years
3 years
Type Amount Granted Grant Date Fair Value Vesting Period
(1)
Of the amount granted, 218,898 vested immediately on the grant date and the remaining amount vests over a
three-year period.
During the years ended December 31, 2020, 2019 and 2018, we granted 1,014,753, 520,236 and 851,170 RSAs,
respectively, under the 2017 Equity Plan to a select group of eligible participants which includes our employees,
directors and employees of our Manager who perform services for us. The awards were granted based on the market
price of the Company’s common stock on the respective grant date and generally vest over a three-year period. Expenses
related to the vesting of these awards are reflected in general and administrative expenses in our consolidated statements
of operations. No RSUs were granted under the 2017 Equity Plan during the years ended December 31, 2020, 2019 and
2018.
165
The following shares of common stock were issued, without restriction, to our Manager as part of the incentive
and base management compensation due under the Management Agreement during the years ended December 31, 2020,
2019 and 2018:
Timing of Issuance
May 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
February 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares of
Common
Stock Issued
2,065,322
355,910
38,942
495,363
98,026
131,179
224,071
545,641
Price
per share
(1)
$ 25.51
24.08
22.16
21.94
21.67
21.49
20.13
(1)
1,422,143 shares of common stock were issued with a share price of $13.42 relating to the first quarter base
management fee. 643,179 shares of common stock were issued with a share price of $12.25 relating to the first
quarter incentive fee.
The following table summarizes our share - based compensation expenses during the years ended December 31,
2020, 2019 and 2018 (in thousands):
Management fees:
Manager incentive fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Base management fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 Manager Equity Plan (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative:
2017 Equity Plan (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the year ended December 31,
2020
2019
2018
$
15,405
19,088
17,987
52,480
$ 10,082
—
20,255
30,337
$ 20,700
—
12,573
33,273
13,254
13,254
65,734
15,900
15,900
$ 46,237
10,185
10,185
$ 43,458
Total share-based compensation expense (2) . . . . . . . . . . . . . . . . . . .
$
(1)
(2)
Share-based compensation expense relating to the Manager Equity Plan is reflected within the 2017 Manager
Equity Plan. Share-based compensation expense relating to the Non-Executive Director Stock Plan and the
Equity Plan are reflected within the 2017 Equity Plan.
The income tax benefit associated with the share-based compensation expense for the years ended
December 31, 2020, 2019 and 2018 was immaterial.
Schedule of Non - Vested Shares and Share Equivalents (1)
2017
2017
Equity Plan
Manager
Equity Plan
Total
Balance as of January 1, 2020 . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . . . . . . .
1,413,170
1,014,753
(807,854)
(25,464)
1,594,605
1,305,597
1,800,000
(818,701)
—
2,286,896
2,718,767 $
2,814,753
(1,626,555)
(25,464)
3,881,501
Weighted Average
Grant Date Fair
Value (per share)
22.74
14.64
21.93
14.06
17.26
(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.
166
The weighted average grant date fair value per share of grants during the years ended December 31, 2020, 2019
and 2018 was $14.64, $24.01 and $21.20, respectively.
Vesting Schedule
2017 Equity 2017 Manager
Plan
Equity Plan
Total
790,918
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
487,506
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
316,181
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,594,605
991,619 1,782,537
845,277 1,332,783
766,181
450,000
2,286,896 3,881,501
As of December 31, 2020, there was approximately $56.1 million of total unrecognized compensation costs
related to unvested share - based compensation arrangements which are expected to be recognized over a weighted
average period of 2.2 years. The total fair value of shares vested during the years ended December 31, 2020, 2019 and
2018 were $35.7 million, $33.2 million and $18.3 million, respectively, as of the respective vesting dates.
Non-Controlling Interests in Consolidated Subsidiaries
As discussed in Note 3, in connection with our Woodstar II Portfolio acquisitions, we issued 10.2 million Class
A Units in our consolidated subsidiary, SPT Dolphin, and rights to receive an additional 1.9 million Class A Units if
certain contingent events occur. During the years ended December 31, 2020, 2019 and 2018, we issued 0.1 million, 0.1
million and 1.7 million, respectively, of the total 1.9 million contingent Class A Units to the Contributors. The Class A
Units are redeemable for consideration equal to the current share price of the Company’s common stock on a one-for-one
basis, with the consideration paid in either cash or the Company’s common stock, at the determination of the Company.
During the year ended December 31, 2020, redemptions of 0.5 million of the Class A Units were received, of which 0.4
million were settled in common stock and 0.1 million were settled for $1.3 million in cash. During the year ended
December 31, 2019, redemptions of 1.0 million of the Class A Units were received and settled in common stock. No
Class A Units were redeemed during the year ended December 31, 2018. In consolidation, the outstanding Class A Units
are reflected as non-controlling interests in consolidated subsidiaries on our consolidated balance sheets, the balance of
which was $226.7 million and $235.9 million as of December 31, 2020 and 2019, respectively.
To the extent SPT Dolphin has sufficient cash available, the Class A Units earn a preferred return indexed to the
dividend rate of the Company’s common stock. Any distributions made pursuant to this waterfall are recognized within
net income attributable to non-controlling interests in our consolidated statements of operations. During the years ended
December 31, 2020, 2019 and 2018, we recognized net income attributable to non-controlling interests of $20.4 million,
$21.6 million and $17.6 million, respectively, associated with these Class A Units.
As discussed in Note 15, we entered into the CMBS JV within our Investing and Servicing Segment in
December 2019. In connection with the formation of this venture, we sold assets totaling $333.0 million to the CMBS
JV, including $318.3 million of CMBS, $13.3 million of interests in various existing CMBS joint ventures, and $1.4
million of related interest receivables. We obtained a 51% interest in the venture for cash consideration of $169.8
million, and our joint venture partner obtained a 49% interest for $163.2 million. The $13.3 million of joint venture
interests that we contributed into the CMBS JV relate to joint ventures which we consolidate. The CMBS within these
ventures carried a fair value of $24.5 million at the time of sale and related non-controlling interests of $11.2 million.
Because the CMBS JV was deemed a VIE for which we were the primary beneficiary (see Note 15), this
transaction was not recognized as a sale for GAAP purposes. Instead, the 49% interest of our joint venture partner is
reflected as a non-controlling interest in consolidated subsidiaries on our consolidated balance sheets, and any net
income attributable to this 49% joint venture interest is reflected within net income attributable to non-controlling
interests in our consolidated statement of operations. The non-controlling interests in the CMBS JV were $126.7 million
and $175.6 million as of December 31, 2020 and 2019, respectively. During the year ended December 31, 2020, net
income attributable to non-controlling interests was $9.3 million. During the year ended December 31, 2019, net income
attributable to non-controlling interests was immaterial.
167
In March 2018, we acquired the non-controlling interest held by a third party in one of our consolidated REIS
Equity Portfolio properties, which was carried at $0.3 million, for $3.3 million. The excess of the consideration paid to
acquire the non-controlling interest over the carrying value of the non-controlling interest was recorded as a reduction of
stockholders’ equity in March 2018.
18. 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):
Basic Earnings
Income attributable to STWD common stockholders . . . . . . . . . . . . . . . . $
Less: Income attributable to participating shares not already
deducted as non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
331,689 $
509,664 $
385,830
(5,216)
326,473 $
(3,873)
505,791 $
(3,592)
382,238
For the Year Ended December 31,
2019
2018
2020
Diluted Earnings
Income attributable to STWD common stockholders . . . . . . . . . . . . . . . . $
Less: Income attributable to participating shares not already
deducted as non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Interest expense on Convertible Notes (1) . . . . . . . . . . . . . . . . . . . .
Add: Loss on extinguishment of Convertible Notes (1) . . . . . . . . . . . . . .
Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
326,473 $
331,689 $
509,664 $
385,830
(5,216)
*
*
(3,873)
12,354
—
518,145 $
(3,592)
25,148
2,099
409,485
Number of Shares:
Basic — Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities — Convertible Notes (1) . . . . . . . . . . . . . . .
Effect of dilutive securities — Contingently issuable shares . . . . . . . . . .
Effect of dilutive securities — Unvested non-participating shares . . . . .
Diluted — Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . .
281,978
*
383
122
282,483
279,337
9,805
360
210
289,712
265,279
22,659
546
—
288,484
Earnings Per Share Attributable to STWD Common Stockholders:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.16 $
1.16 $
1.81 $
1.79 $
1.44
1.42
(1)
The Company does not intend to fully settle the principal amount of the Convertible Notes in cash upon
conversion. Accordingly, under GAAP, the dilutive effect to EPS for the years ended December 31, 2020, 2019
and 2018 is determined using the “if-converted” method whereby interest expense or any loss on
extinguishment of our Convertible Notes is added back to the diluted EPS numerator and the full number of
potential shares contingently issuable upon their conversion is included in the diluted EPS denominator, if
dilutive. Refer to Note 11 for further discussion.
*
Our Convertible Notes were not dilutive for the year ended December 31, 2020.
As of December 31, 2020, 2019 and 2018, participating shares of 14.4 million, 13.3 million and 13.8 million,
respectively, were excluded from the computation of diluted shares as their effect was already considered under the more
dilutive two-class method used above. Such participating shares at December 31, 2020, 2019 and 2018 included 10.6
million, 11.0 million and 11.9 million potential shares, respectively, of our common stock issuable upon redemption of
the Class A Units in SPT Dolphin, as discussed in Note 17.
168
19. Accumulated Other Comprehensive Income
The changes in AOCI by component are as follows (amounts in thousands):
Cumulative
Unrealized Gain
(Loss) on
Effective Portion of
Cumulative Loss on Available-for-
Sale Securities
Cash Flow Hedges
Balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
OCI before reclassifications . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . .
Net period OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OCI before reclassifications . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . .
Net period OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OCI before reclassifications . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . .
Net period OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
25 $
8
(33)
(25)
—
—
—
—
—
—
—
—
— $
Total
Foreign
Currency
Translation
57,889 $ 12,010 $ 69,924
(8,247)
(6,865)
(1,390)
(3,017)
—
(2,984)
(11,264)
(6,865)
(4,374)
58,660
5,145
53,515
(6,125)
(3,665)
(2,460)
(1,603)
(1,544)
(59)
(7,728)
(5,209)
(2,519)
50,932
(64)
50,996
(6,939)
—
(6,939)
—
—
—
(6,939)
(6,939)
—
(64) $ 43,993
44,057 $
The reclassifications out of AOCI impacted the consolidated statements of operations for the years ended
December 31, 2020, 2019 and 2018 as follows (amounts in thousands):
Details about AOCI Components
Gain on cash flow hedges:
Amounts Reclassified from
AOCI during the Year
Ended December 31,
2018
2020
2019
Affected Line Item
in the Statements
of Operations
Interest rate contracts . . . . . . . . . . . . . . . .
—
— $
33 Interest expense
Unrealized gains on available-for-sale
securities:
Interest realized upon collection . . . . . . . . $ — $
Net realized gain on sale of investment . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
59
—
59
46 Interest income from investment securities
2,938 Gain on sale of investments and other assets, net
2,984
Foreign currency translation:
Foreign currency gain from sale of
Ireland Portfolio . . . . . . . . . . . . . . . . . . . .
—
1,544
— Gain on sale of investments and other assets, net
Total reclassifications for the period . . . . . . . $ — $ 1,603 $ 3,017
169
20. 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. In the event that
observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is
appropriate and consistently applied and the assumptions are reasonable.
Pricing Verification—We use recently executed transactions, other observable market data such as exchange
data, broker/dealer quotes, third party pricing vendors and aggregation services for validating the fair values generated
using valuation models. Pricing data provided by approved external sources is evaluated using a number of approaches;
for example, by corroborating the external sources’ prices to executed trades, analyzing the methodology and
assumptions used by the external source to generate a price and/or by evaluating how active the third party pricing
source (or originating sources used by the third party pricing source) is in the market.
Unobservable Inputs—Where inputs are not observable, we review the appropriateness of the proposed
valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input.
The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the
use of comparable observable inputs.
Any changes to the valuation methodology will be reviewed by our management to ensure the changes are
appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or
reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and
consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value
could result in a different estimate of fair value at the reporting date.
Fair Value on a Recurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a recurring basis as
follows:
Loans held-for-sale, commercial
We measure the fair value of our commercial mortgage loans held-for-sale using a discounted cash flow
analysis unless observable market data (i.e., securitized pricing) is available. A discounted cash flow analysis requires
management to make estimates regarding future interest rates and credit spreads. The most significant of these inputs
170
relates to credit spreads and is unobservable. Thus, we have determined that the fair values of mortgage loans valued
using a discounted cash flow analysis should be classified in Level III of the fair value hierarchy, while mortgage loans
valued using securitized pricing should be classified in Level II of the fair value hierarchy. Mortgage loans classified in
Level III are transferred to Level II if securitized pricing becomes available.
Loans held-for-sale and loans held-for-investment, residential
We measure the fair value of our residential loans held-for-sale and held-for-investment based on the net
present value of expected future cash flows using a combination of observable and unobservable inputs. Observable
market participant assumptions include pricing related to trades of residential loans with similar characteristics.
Unobservable inputs include the expectation of future cash flows, which involves judgments about the underlying
collateral, the creditworthiness of the borrower, estimated prepayment speeds, estimated future credit losses, forward
interest rates, investor yield requirements and certain other factors. At each measurement date, we consider both the
observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the
unobservable inputs, these loans have been classified within Level III.
RMBS
RMBS are valued utilizing observable and unobservable market inputs. The observable market inputs include
recent transactions, broker quotes and vendor prices (“market data”). However, given the implied price dispersion
amongst the market data, the fair value determination for RMBS has also utilized significant unobservable inputs in
discounted cash flow models including prepayments, default and severity estimates based on the recent performance of
the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macroeconomic events
(e.g., housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and
unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable
inputs these securities have been classified within Level III.
CMBS
CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected
future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities
and the spreads used in the prior valuation. We obtain current market spread information where available and use this
information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value
inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value
hierarchy. CMBS may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs
used to price the CMBS become or cease to be observable.
Equity security
The equity security is publicly registered and traded in the U.S. and its market price is listed on the London
Stock Exchange. The security has been classified within Level I.
Domestic servicing rights
The fair value of this intangible is determined using discounted cash flow modeling techniques which require
management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control
migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default
occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this
intangible in its entirety should be classified in Level III of the fair value hierarchy.
171
Derivatives
The valuation of derivative contracts are determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms
of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate
curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined
using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected
variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves)
derived from observable market interest rate curves.
We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the
respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our
derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable
credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
The valuation of over the counter derivatives are determined using discounted cash flows based on Overnight
Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments
to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but include
appropriate economic adjustments for funding costs (i.e., a LIBOR OIS basis adjustment to approximate uncollateralized
cost of funds) and credit risk. For credit index instruments, fair value is determined based on changes in the relevant
indices from the date of initiation of the instrument to the reporting date, as these changes determine the amount of any
future cash settlement between us and the counterparty. These indices are considered Level II inputs as they are directly
observable.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of
the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as
estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of
December 31, 2020 and 2019, we have assessed the significance of the impact of the credit valuation adjustments on the
overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant
to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety
are classified in Level II of the fair value hierarchy.
Liabilities of consolidated VIEs
Our consolidated VIE liabilities generally represent bonds that are not owned by us. The majority of these are
either traded in the marketplace or can be analogized to similar securities that are traded in the marketplace. For these
liabilities, pricing is considered to be Level II, where the valuation is based upon quoted prices for similar instruments
traded in active markets. We generally utilize third party pricing service providers for valuing these liabilities. In order
to determine whether to utilize the valuations provided by third parties, we conduct an ongoing evaluation of their
valuation methodologies and processes, as well as a review of the individual valuations themselves. In evaluating third
party pricing for reasonableness, we consider a variety of factors, including market transaction information for the
particular bond, market transaction information for bonds within the same trust, market transaction information for
similar bonds, the bond’s ratings and the bond’s subordination levels.
For the minority portion of our consolidated VIE liabilities which consist of unrated or non-investment grade
bonds that are not owned by us, pricing may be either Level II or Level III. If independent third party pricing similar to
that noted above is available, we consider the valuation to be Level II. If such third party pricing is not available, the
valuation is generated from model-based techniques that use significant unobservable assumptions, and we consider the
valuation to be Level III. For VIE liabilities classified as Level III, valuation is determined based on discounted
expected future cash flows which take into consideration expected duration and yields based on market transaction
information, ratings, subordination levels, vintage and current market spread. VIE liabilities may shift between Level II
172
and Level III of the fair value hierarchy if the significant fair value inputs used to price the VIE liabilities become or
cease to be observable.
Assets of consolidated VIEs
The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no
active management of the underlying assets. In determining the fair value of the assets of the VIE, we maximize the use
of observable inputs over unobservable inputs. The individual assets of a VIE are inherently incapable of precise
measurement given their illiquid nature and the limitations on available information related to these assets. Because our
methodology for valuing these assets does not value the individual assets of a VIE, but rather uses the value of the VIE
liabilities as an indicator of the fair value of VIE assets as a whole, we have determined that our valuations of VIE assets
in their entirety should be classified in Level III of the fair value hierarchy.
Fair Value on a Nonrecurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a nonrecurring basis
as follows:
Loans held-for-sale, infrastructure
We measure the fair value of infrastructure loans held-for-sale, which are carried at the lower of amortized cost
or fair value, utilizing bids periodically received from third parties to acquire these assets. As these bids represent
observable market data, we have determined that the fair value of these assets would be classified in Level II of the fair
value hierarchy.
Fair Value Only Disclosed
We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:
Loans held - for - investment and loans held-for-sale
We estimate the fair values of our loans not carried at fair value on a recurring basis by discounting their
expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our
loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the
financial statements. Since these inputs are unobservable, we have determined that the fair value of these loans in their
entirety would be classified in Level III of the fair value hierarchy.
HTM debt securities
We estimate the fair value of our mandatorily redeemable preferred equity interests in commercial real estate
companies and infrastructure bonds using the same methodology described for our loans held - for - investment. We
estimate the fair value of our HTM CMBS using the same methodology described for our CMBS carried at fair value on
a recurring basis.
Secured financing agreements, CLO and unsecured senior notes not convertible
The fair value of the secured financing agreements, CLO and unsecured senior notes not convertible are
determined by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if
executed in the current market. We have determined that our valuation of these instruments should be classified in Level
III of the fair value hierarchy.
173
Convertible Notes
The fair value of the debt component of our Convertible Notes is estimated by discounting the contractual cash
flows at the interest rate we estimate such notes would bear if sold in the current market without the embedded
conversion option which, in accordance with ASC 470, is reflected as a component of equity. We have determined that
our valuation of our Convertible Notes should be classified in Level III of the fair value hierarchy.
Fair Value Disclosures
The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the
consolidated balance sheets by their level in the fair value hierarchy as of December 31, 2020 and 2019 (amounts in
thousands):
Total
Level I
Level II
Level III
December 31, 2020
Financial Assets:
Loans under fair value option . . . . . . . . . . . . . . . . . . . . . . $ 1,022,979 $
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic servicing rights . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,513,117 $ 11,247 $
Financial Liabilities:
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,817,695 $
— $
—
—
11,247
—
—
—
167,349
19,457
11,247
13,202
40,555
64,238,328
62,776,371
41,324 $
— $
—
—
—
—
40,555
—
1,022,979
167,349
19,457
—
13,202
—
64,238,328
40,555 $ 65,461,315
41,324 $
— $
60,756,495
—
— $ 60,797,819 $
—
2,019,876
2,019,876
Total
Level I
Level II
Level III
December 31, 2019
Financial Assets:
Loans under fair value option . . . . . . . . . . . . . . . . . . . . . . $
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic servicing rights . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,908,829 $ 12,664 $
Financial Liabilities:
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,752,234 $
1,436,194 $
189,576
37,360
12,664
16,917
28,943
62,187,175
— $
—
—
12,664
—
—
—
60,743,494
8,740 $
— $
—
12,352
—
—
28,943
1,436,194
189,576
25,008
—
16,917
—
62,187,175
41,295 $ 63,854,870
8,740 $
— $
—
— $ 58,214,842 $
58,206,102
—
2,537,392
2,537,392
174
The changes in financial assets and liabilities classified as Level III are as follows for the years ended
December 31, 2020 and 2019 (amounts in thousands):
January 1, 2019 balance . . . . . . . . . . . . $
Total realized and unrealized gains
Loans at
Fair Value
671,282
RMBS
209,079
CMBS
Servicing
Rights
VIE Assets
25,228
20,557
53,446,364
VIE
Liabilities
(1,441,446) $ 52,931,064
Total
Domestic
(losses):
Included in earnings:
Change in fair value / gain on sale . .
Net accretion . . . . . . . . . . . . . . . . .
Included in OCI . . . . . . . . . . . . . . . .
Purchases / Originations . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuances . . . . . . . . . . . . . . . . . . . . . . . .
Cash repayments / receipts . . . . . . . . . . .
Transfers into Level III . . . . . . . . . . . . . .
Transfers out of Level III . . . . . . . . . . . .
Consolidation of VIEs . . . . . . . . . . . . . .
Deconsolidation of VIEs . . . . . . . . . . . . .
December 31, 2019 balance . . . . . . . . .
Total realized and unrealized gains
(losses):
Included in earnings:
71,337
—
—
4,015,167
(2,951,713)
—
(144,066)
—
(225,813)
—
—
1,436,194
—
9,945
(2,519)
—
—
—
(26,929)
—
—
—
—
189,576
505
—
—
5,165
(7,326)
—
(11,348)
5,350
—
—
7,434
25,008
(3,640)
—
—
—
—
—
—
—
—
—
—
16,917
(1,250,935)
—
—
—
—
—
—
—
—
10,368,817
(377,071)
62,187,175
47,308
—
—
—
—
(116,273)
(16,093)
(1,728,562)
991,378
(311,748)
38,044
(2,537,392)
(1,135,425)
9,945
(2,519)
4,020,332
(2,959,039)
(116,273)
(198,436)
(1,723,212)
765,565
10,057,069
(331,593)
61,317,478
Change in fair value / gain on sale . .
(2,140,452)
Net accretion . . . . . . . . . . . . . . . . .
10,712
(6,939)
Included in OCI . . . . . . . . . . . . . . . .
Purchases / Originations . . . . . . . . . . . . .
2,304,924
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,810,662)
(29,927)
Issuances . . . . . . . . . . . . . . . . . . . . . . . .
Cash repayments / receipts . . . . . . . . . . .
(265,885)
Transfers into Level III . . . . . . . . . . . . . .
(1,393,905)
1,902,944
Transfers out of Level III . . . . . . . . . . . .
Transfers within Level III . . . . . . . . . . . .
—
Consolidation of VIEs . . . . . . . . . . . . . .
4,563,946
(10,795)
Deconsolidation of VIEs . . . . . . . . . . . . .
December 31, 2020 balance . . . . . . . . . $ 1,022,979 $ 167,349 $ 19,457 $ 13,202 $ 64,238,328 $ (2,019,876) $ 63,441,439
Amount of unrealized (losses) gains
attributable to assets still held at
December 31, 2020:
(2,405,599)
—
—
—
—
—
—
—
—
(176,614)
4,665,636
(32,270)
128,747
—
—
—
—
(29,927)
(9,901)
(1,393,905)
1,902,944
—
(101,690)
21,248
133,124
—
—
2,304,924
(2,802,722)
—
(225,155)
—
—
176,614
—
—
—
10,712
(6,939)
—
—
—
(26,000)
—
—
—
—
—
(3,715)
—
—
—
—
—
—
—
—
—
—
—
6,991
—
—
—
(7,940)
—
(4,829)
—
—
—
—
227
Included in earnings . . . . . . . . . . . . . . $
Included in OCI . . . . . . . . . . . . . . . . .
26,041
—
10,712
(6,939)
1,127
—
(3,715)
—
(2,327,393)
—
128,747 $ (2,164,481)
(6,939)
—
Amount of unrealized (losses) gains
included in earnings attributable to
assets still held at December 31, 2019 . .
(4,459)
9,858
(666)
(3,640)
(1,250,935)
47,308
(1,202,534)
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.
175
RMBS . . . . . . . . .
167,349 Discounted cash flow Constant prepayment rate (a)
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 consolidated balance sheets (amounts in thousands):
Financial assets not carried at fair value:
December 31, 2020
December 31, 2019
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Loans held-for-investment and loans held-for-sale . . . . . $ 11,116,929 $ 11,107,316 $ 10,034,030 $ 10,086,372
568,727
HTM debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
570,638
538,605
515,253
Financial liabilities not carried at fair value:
Secured financing agreements and CLO . . . . . . . . . . . . . . $ 11,076,744 $ 11,108,364 $ 9,834,108 $ 9,826,511
2,022,283
Unsecured senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,928,622
1,732,520
1,786,667
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):
Loans under fair
value option . . . $
1,022,979
Carrying Value at
December 31, 2020
Valuation
Technique
Discounted cash flow,
market pricing
Coupon (d)
Unobservable
Input
Range (Weighted Average) as of (1)
December 31, 2020
December 31, 2019
Remaining contractual term (d)
FICO score (a)
LTV (b)
Purchase price (d)
Constant default rate (b)
Loss severity (b)
Delinquency rate (c)
Servicer advances (a)
Annual coupon deterioration (b)
Putback amount per projected
3.3% - 9.7% (5.9%)
7.3 - 39.3 years (26.3
years)
519 - 823 (727)
5% - 94% (68%)
84.4% - 104.8% (99.8%)
3.6% - 19.4% (7.6%)
0.7% - 5.4% (2.4%)
0% - 85% (20%) (f)
10% - 32% (19%)
23% - 82% (54%)
0.0% - 0.9% (0.1%)
3.4% - 5.9%
8.3 - 39.9 years
580 - 823
6% - 94%
85.6% - 104.8%
3.1% - 24.9%
0.5% - 5.0%
0% - 93% (f)
5% - 29%
27% - 85%
0% - 1.6%
0% - 28%
0% - 122.9%
0 - 9.7 years
7.50%
15%
0% - 690.7%
0 - 19.2 years
0% - 690.7%
0 - 12.7 years
CMBS . . . . . . . . .
19,457 Discounted cash flow Yield (b)
Duration (c)
total collateral loss (e)
Domestic servicing
rights . . . . . . . .
13,202 Discounted cash flow Debt yield (a)
Discount rate (b)
VIE assets . . . . . .
64,238,328 Discounted cash flow Yield (b)
Duration (c)
VIE liabilities . . . .
(2,019,876) Discounted cash flow Yield (b)
Duration (c)
0% -17% (0.8%)
0% - 536.6% (7.1%)
0 - 7.6 years (5.3 years)
7.50% (7.50%)
15% (15%)
0% - 312.2% (14.3%)
0 - 16.3 years (3.8 years)
0% - 312.2% (14.4%)
0 - 10.8 years (3.8 years)
(1)
Unobservable inputs were weighted by the relative carrying value of the instruments as of December 31, 2020.
Information about Uncertainty of Fair Value Measurements
(a)
(b)
(c)
(d)
(e)
(f)
Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher
(lower) fair value measurement.
Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower
(higher) fair value measurement.
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.
This unobservable input is not subject to variability as of the respective reporting dates.
Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our
RMBS portfolio.
23% and 34% of the portfolio falls within a range of 45% - 80% as of December 31, 2020 and 2019,
respectively.
176
21. Income Taxes
Certain of our domestic subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs
permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet
specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in
entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will
continue to maintain our qualification as a REIT.
Our TRSs engage in various real estate related operations, including special servicing of commercial real estate,
originating and securitizing mortgage loans, and investing in entities which engage in real estate-related operations. As
of December 31, 2020 and 2019, approximately $1.4 billion and $1.6 billion, respectively, of assets 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.
Our income tax provision consisted of the following for the years ended December 31, 2020, 2019 and 2018 (in
thousands):
Current
For the year ended December 31,
2018
2019
2020
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,690 $ 4,917 $ 10,508
3,010
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
293
13,811
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,201
195
9,086
3,182
977
9,076
Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,189
330
1,519
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,197 $ 13,232 $ 15,330
8,213
2,898
11,111
3,869
287
4,156
Deferred income taxes in our U.S. tax jurisdiction reflect the net tax effects of temporary differences between
the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. The following table presents the tax effects of temporary differences on net deferred tax assets which are
classified in other assets in our consolidated balance sheets (in thousands):
Deferred tax asset, net
Reserves and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating and capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other U.S. temporary differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
December 31,
2020
2019
4,571
(1,672)
(310)
579
(1,236)
—
974
2
2,908
$
$
4,017
8,185
(1,950)
2,752
(116)
19
885
228
14,020
Unrecognized tax benefits were not material as of and during the years ended December 31, 2020 and 2019.
The Company’s tax returns are no longer subject to audit for years ended prior to January 1, 2017. The Company had
177
pre-tax income from foreign operations of $0.9 million and $1.4 million during the years ended December 31, 2019 and
2018, respectively. There was no pre-tax income from foreign operations during the year ended December 31, 2020.
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 provision for the years ended December 31, 2020, 2019 and 2018 (dollars in thousands):
Federal statutory tax rate . . . . . . . . $
REIT and other non-taxable loss . .
State income taxes . . . . . . . . . . . . .
Federal benefit of state tax
For the Year Ended December 31,
2019
115,535
2020
2018
81,118 21.0 % $
(58,265)
7,509
(15.1)%
1.9 %
(106,301)
3,034
21.0 % $
(19.3)%
0.5 %
89,571
(77,972)
3,038
21.0 %
(18.3)%
0.7 %
deduction . . . . . . . . . . . . . . . . . . .
(1,577)
(0.4)%
(637)
(0.1)%
(638)
(0.1)%
Net operating loss carryback rate
differential . . . . . . . . . . . . . . . . . .
Intra-entity transfer . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . $
(3,387)
(5,385)
184
20,197
(0.9)%
(1.4)%
0.1 %
5.2 %
$
—
—
1,601
13,232
— %
— %
0.3 %
2.4 % $
—
—
1,331
15,330
— %
—
0.3 %
3.6 %
There were no valuation allowances during the years ended December 31, 2020, 2019 and 2018.
In response to the COVID-19 pandemic, the U.S. and many other governments have enacted, or are
contemplating enacting, measures to provide aid and economic stimulus. These measures include deferring the due dates
of tax payments and other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to
assist companies, including temporary changes to income and non-income-based tax laws, and to allow companies to
carry back tax net operating losses (“NOLs”) generated in 2018 to 2020 to the five preceding tax years. The Company
plans to carry back its NOL generated this year to a year in which the federal tax rate was 35%, resulting in a tax benefit
from the NOL carryback for the year ended December 31, 2020. We continue to monitor additional guidance issued by
the U.S. Treasury Department, the Internal Revenue Service and others.
22. Commitments and Contingencies
As of December 31, 2020, our Commercial and Residential Lending Segment had future commercial loan
funding commitments totaling $1.6 billion, of which we expect to fund $1.3 billion. These future funding commitments
primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions.
As of December 31, 2020, our Infrastructure Lending Segment had future infrastructure loan funding
commitments totaling $201.2 million, including $121.6 million under revolvers and letters of credit (“LCs”), and $79.6
million under delayed draw term loans. As of December 31, 2020, $19.5 million of revolvers and LCs were outstanding.
In connection with the Infrastructure Lending Segment acquisition, we assumed guarantees of certain
borrowers’ performance under existing interest rate swaps. As of December 31, 2020, we had six outstanding guarantees
on interest rate swaps maturing between March 2022 and June 2025. Refer to Note 13 for further discussion.
Generally, funding commitments are subject to certain conditions that must be met, such as customary
construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are
made to the borrower.
Management is not aware of any other contractual obligations, legal proceedings, or any other contingent
obligations incurred in the normal course of business that would have a material adverse effect on our consolidated
financial statements.
178
Lease Commitment Disclosures
Our lease commitments consist of corporate office leases and ground leases for investment properties, all of
which are classified as operating leases. We sublease some of the space within our corporate offices to third parties.
The following lease commitment disclosures do not include leases which have not yet commenced, such as the Miami
Beach office lease agreement discussed in Note 16. Our lease costs and sublease income were as follows (in thousands):
Operating lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term lease costs . . . . . . . . . . . . . . . . . . . . . . . . .
Sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,571 $
42
(1,509)
4,104
$
5,634 $
115
(1,613)
4,136
$
4,962
210
(1,643)
3,529
2020
For the Year Ended December 31,
2019
2018
Information concerning our operating lease liabilities, which are classified within accounts payable, accrued
expenses and other liabilities in our consolidated balance sheets as of December 31, 2020 and 2019, is as follows (dollars
in thousands):
Cash paid for amounts included in the measurement of lease
liabilities—operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,268 $
5,215
Weighted-average remaining lease term . . . . . . . . . . . . . . . . . .
Weighted-average discount rate . . . . . . . . . . . . . . . . . . . . . . . . .
7.0 years
4.1 %
6.0 years
4.4 %
December 31, 2020
December 31, 2019
For the Year Ended December 31,
2020
2019
Future maturity of operating lease liabilities:
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less interest component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
3,480
1,272
1,281
1,290
1,350
4,461
13,134
(1,691)
11,443
179
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24. Quarterly Financial Data (Unaudited)
The following table summarizes our quarterly financial data which, in the opinion of management, reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of
operations (amounts in thousands, except per share amounts):
For the Three-Month Periods Ended
March 31
June 30
September 30
December 31
2020:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 312,560 $ 265,606
152,961
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
139,656
Net (loss) income attributable to Starwood Property Trust, Inc. .
0.49
(Loss) earnings per share — Basic . . . . . . . . . . . . . . . . . . . . . . . . .
0.49
(Loss) earnings per share — Diluted . . . . . . . . . . . . . . . . . . . . . . .
(66,269)
(66,769)
(0.24)
(0.24)
$ 267,427
164,734
151,834
0.53
0.52
$ 290,562
114,655
106,968
0.37
0.37
2019:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 310,480 $ 311,181
132,446
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127,016
Net income attributable to Starwood Property Trust, Inc. . . . . . .
0.45
Earnings per share — Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.45
Earnings per share — Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
76,508
70,383
0.25
0.25
$ 288,330
150,001
140,396
0.50
0.49
$ 286,428
177,980
171,869
0.61
0.60
Annual EPS may not equal the sum of each quarter’s EPS due to rounding and other computational factors.
25. Subsequent Events
Our significant events subsequent to December 31, 2020 were as follows:
Secured Financing Agreements
In January 2021, we entered into a Residential Loans repurchase facility to finance residential loans. The
facility carries a one-year term, which we intend to extend every three months, and an annual interest rate of one-month
LIBOR + 2.00% to 2.50% subject to a 25 bps LIBOR floor. The maximum facility size is $375.0 million.
Collateralized Loan Obligations
In February 2021, we priced STWD 2021-SIF1, a $500.0 million new issue CLO related to a pool of our
infrastructure loans held-for-investment, with $410.0 million of third party financing at an average coupon of LIBOR +
181 bps. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new
loans or participation interests in loans to the CLO for a period of three years. The transaction is subject to customary
closing conditions.
185
Starwood Property Trust, Inc. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2020
(Dollars in thousands)
Costs
Property Type /
Geographic Location
Aggregated Properties
Hotel—U.S., Midwest
Initial Cost
to Company
Encumbrances Land
Property
Capitalized
Subsequent to
Acquisition(1) Land
Gross Amounts Carried at
December 31, 2020
Property
Total
Accumulated
Depreciation(3)
Acquisition
Date
(1 property) . . . . . . . . . . $
— $
— $
5,565 $
1,017 $
— $
6,582 $
6,582 $
(2,612)
Feb-18
Medical office—U.S.,
Midwest (7 properties) . . .
78,048
2,764
97,797
553
2,764
98,350
101,114
(12,788)
Dec-16
Medical office—U.S.,
North East (7 properties) .
191,661
11,283
176,996
—
11,283
176,996
188,279
(21,811)
Dec-16
Medical office—U.S.,
South East (6 properties) .
107,252
7,930
117,740
137
7,930
117,877
125,807
(15,310)
Dec-16
Medical office—U.S.,
South West (8 properties) .
125,345
15,921
126,842
858
15,921
127,700
143,621
(17,780)
Dec-16
Medical office—U.S.,
West (6 properties) . . . . .
97,694
13,415
107,844
589
13,415
108,433
121,848
(16,006)
Dec-16
Mixed Use—U.S., West
(1 property) . . . . . . . . . .
8,667
1,001
14,323
525
1,001
14,848
15,849
(2,111)
Feb-16
Multifamily—U.S., South
East (60 properties) . . . . .
1,028,902 251,084
928,384
40,175 251,113
968,530 1,219,643
(155,037) Oct-15 to Aug-19
Office—U.S., North East
(1 property) . . . . . . . . . .
19,018
7,250
10,614
6,783
7,250
17,397
24,647
(2,702)
May-18
Office—U.S., South East
(1 property) . . . . . . . . . .
24,873
4,879
16,862
2,699
4,879
19,561
24,440
(5,565)
Oct-16
Office—U.S., South West
(2 properties) . . . . . . . . .
31,622
8,188
28,019
5,673
8,188
33,692
41,880
(4,125) Sep-17 to Feb-18
Office—U.S., West
(1 property) . . . . . . . . . .
Retail—U.S., Mid Atlantic
—
—
4,261
8,228
—
12,489
12,489
(2,702)
Oct-17
(1 property) . . . . . . . . . .
18,000
6,432
6,315
12,580
6,432
18,895
25,327
(2,975)
Mar-16
Retail—U.S., Midwest
(7 properties) . . . . . . . . .
79,300
24,384
109,445
1,354
24,384
110,799
135,183
(13,531) Nov-15 to Sep-17
Retail—U.S., North East
(1 property) . . . . . . . . . .
11,567
472
12,260
625
472
12,885
13,357
(2,346)
Nov-15
Retail—U.S., South East
(5 properties) . . . . . . . . .
42,469
21,353
60,618
53
21,353
60,671
82,024
(6,221) Sep-16 to Sep-17
Retail—U.S., South West
(6 properties) . . . . . . . . .
76,513
37,254
78,579
96
37,254
78,675
115,929
(10,654) Oct-14 to Sep-17
Retail—U.S., West
(2 properties) . . . . . . . . .
33,000
18,633
36,794
—
18,633
36,794
55,427
(4,144)
Sep-17
Self-storage—U.S., North
East (1 property) . . . . . . .
14,500
2,202
11,498
239
2,202
11,737
13,939
(1,707)
Dec-15
Industrial—U.S., South East
(2 properties) . . . . . . . . .
50,000
10,121
17,295
3,250
10,121
20,545
30,666
(2,016) Mar-19 to Apr-19
Residential—U.S., North
East (1 property) . . . . . . .
$
Notes to Schedule III:
—
—
75,245
—
—
75,245
75,245
2,038,431 $ 444,566 $ 2,043,296 $
85,434 $ 444,595 $ 2,128,701 $ 2,573,296 (2) $
—
(302,143)
Oct-20
(1)
(2)
(3)
No material costs subsequent to acquisition were capitalized to land.
The aggregate cost for federal income tax purposes is $2.7 billion.
Depreciation is computed based upon estimated useful lives as described in Note 7 to the Consolidated Financial Statements.
186
The following schedule presents our real estate activity during the years ended December 31, 2020, 2019 and
2018 (in thousands):
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,490,630 $ 2,972,803 $ 2,755,050
Additions during the year:
Acquisitions (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions through foreclosure and other transfers . . . . . . . . . . . . . . . .
Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent consideration issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
75,245
25,164
1,576
—
101,985
8,472
27,416
30,865
2,877
—
69,630
445,170
—
25,764
38,211
—
509,145
2020
2019
2018
Deductions during the year:
Costs of real estate sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(269,989)
(21,260)
(143)
(291,392)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,573,296 $ 2,490,630 $ 2,972,803
(535,417)
(15,702)
(684)
(551,803)
(19,319)
—
—
(19,319)
(1)
Refer to Note 16 to the Consolidated Financial Statements for a discussion of property acquisitions from related
parties.
The following schedule presents activity within accumulated depreciation during the years ended December 31,
2020, 2019 and 2018 (in thousands):
2020
2019
2018
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 224,190 $ 187,913 $ 107,569
91,188
(9,389)
(1,455)
$ 187,913
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition/write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
81,610
(3,657)
—
$ 302,143
92,024
(54,260)
(1,487)
$ 224,190
187
Description/ Location
Individually Significant First Mortgages: (5)
Mixed Use, Birmingham, United Kingdom . . . . . . . . . $
Aggregated First Mortgages: (5)
Hotel, International, Floating (3 mortgages) . . . . . . . .
Hotel, International, Floating (4 mortgages) . . . . . . . .
Hotel, Mid Atlantic, Floating (5 mortgages) . . . . . . . .
Hotel, Midwest, Floating (4 mortgages) . . . . . . . . . . .
Hotel, North East, Floating (5 mortgages) . . . . . . . . . .
Hotel, South East, Floating (4 mortgages) . . . . . . . . . .
Hotel, South West, Floating (8 mortgages) . . . . . . . . .
Hotel, Various, Fixed (2 mortgages) . . . . . . . . . . . . . .
Hotel, Various, Floating (7 mortgages) . . . . . . . . . . . .
Hotel, West, Floating (17 mortgages) . . . . . . . . . . . . .
Industrial, International, Floating (3 mortgages) . . . . .
Industrial, International, Floating (2 mortgages) . . . . .
Industrial, South East, Fixed (4 mortgages) . . . . . . . . .
Industrial, Various, Floating (4 mortgages) . . . . . . . . .
Mixed Use, International, Fixed (2 mortgages) . . . . . .
Mixed Use, International, Floating (2 mortgages) . . . .
Mixed Use, International, Floating (1 mortgage) . . . . .
Mixed Use, Mid Atlantic, Floating (1 mortgage) . . . . .
Mixed Use, South West, Floating (13 mortgages) . . . .
Multi-family, International, Fixed (1 mortgage) . . . . .
Multi-family, International, Floating (5 mortgages) . . .
Multi-family, Midwest, Fixed (1 mortgage) . . . . . . . .
Multi-family, Mid Atlantic, Floating (4 mortgages) . . .
Multi-family, North East, Floating (8 mortgages) . . . .
Multi-family, South East, Floating (1 mortgage) . . . . .
Multi-family, South West, Floating (13 mortgages) . . .
Multi-family, West, Floating (3 mortgages) . . . . . . . .
Office, International, Fixed (1 mortgage) . . . . . . . . . .
Office, International, Floating (4 mortgages) . . . . . . . .
Office, International, Floating (2 mortgages) . . . . . . . .
Office, Mid Atlantic, Floating (26 mortgages) . . . . . . .
Office, Midwest, Floating (7 mortgages) . . . . . . . . . . .
Office, North East, Floating (16 mortgages) . . . . . . . .
Office, South East, Fixed (2 mortgages) . . . . . . . . . . .
Office, South East, Floating (4 mortgages) . . . . . . . . .
Office, South West, Floating (11 mortgages) . . . . . . . .
Office, West, Floating (41 mortgages) . . . . . . . . . . . .
Other, Midwest, Floating (4 mortgages) . . . . . . . . . . .
Other, North East, Floating (4 mortgages) . . . . . . . . . .
Other, Various, Fixed (1 mortgage) . . . . . . . . . . . . . .
Other, Various, Floating (1 mortgage) . . . . . . . . . . . . .
Other, West, Floating (8 mortgages) . . . . . . . . . . . . . .
Residential, International, Floating (1 mortgage) . . . . .
Residential, North East, Floating (10 mortgages) . . . . .
Residential, South East, Floating (3 mortgages) . . . . .
Residential, West, Floating (2 mortgages) . . . . . . . . . .
Residential, Various, Fixed (177 mortgages) . . . . . . . .
Retail, Midwest, Floating (4 mortgages) . . . . . . . . . . .
Retail, North East, Floating (1 mortgage) . . . . . . . . . .
Retail, South West, Floating (8 mortgages) . . . . . . . . .
Retail, West, Fixed (1 mortgage) . . . . . . . . . . . . . . . .
Loans Held-for-Sale, Various, Fixed . . . . . . . . . . . . . .
Aggregated Subordinated and Mezzanine Loans: (5)
Hotel, South East, Floating (3 mortgages) . . . . . . . . . .
Industrial, South East, Fixed (1 mortgage) . . . . . . . . .
Industrial, South East, Floating (1 mortgage) . . . . . . .
Mixed Use, International, Floating (1 mortgage) . . . . .
Mixed Use, South East, Floating (2 mortgages) . . . . . .
Mixed Use, South West, Floating (1 mortgage) . . . . . .
Multi-family, Mid Atlantic, Floating (1 mortgage) . . .
Multi-family, North East, Floating (4 mortgages) . . . .
Office, International, Floating (4 mortgages) . . . . . . . .
Office, North East, Fixed (2 mortgages) . . . . . . . . . . .
Starwood Property Trust, Inc. and Subsidiaries
Schedule IV—Mortgage Loans on Real Estate
December 31, 2020
(Dollars in thousands)
Prior
Carrying
Face
Liens (1) Amount Amount
Interest Rate (2)
Payment Maturity Principal Amount of
Terms (3) Date (4) Delinquent Loans
— $ 341,688 $
338,426
3GBP+4.35%
I/O
1/11/2024 $
—
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
3EU+4.90%
63,889
L+3.00% to 9.00%
36,214
L+2.00% to 6.80%
111,442
L+2.25% to 8.63%
53,482
L+2.25% to 12.00%
333,438
L+2.40% to 7.40%
61,836
L+2.00% to 7.67%
173,995
10.50%
45,668
L+2.00% to 10.50%
410,530
L+2.00% to 9.50%
422,293
78,438
3EU+2.25% to 4.65%
47,904 3GBP+2.15% to 4.65%
36,097
8.18%
L+2.25% to 7.25%
129,212
8.50% to 10.00%
41,671
3EU+4.85%
111,444
GBP+3.15%
177,535
41,250
L+3.15%
L+2.50% to 10.00%
291,401
113,650
8.00%
546,878 3GBP+2.66% to 4.50%
6.28%
1,008
L+1.75% to 5.75%
91,972
L+1.85% to 6.45%
266,397
L+4.25%
39,601
L+2.50% to 3.00%
159,992
L+3.75%
101,473
247,151
5.35%
389,472 3GBP+3.50% to 4.25%
EUR+6.00% to 7.80%
L+1.75% to 7.50%
L+1.75% to 9.75%
L+2.80% to 12.00%
5.00% to 12.00%
L+2.00% to 8.25%
L+2.00% to 8.55%
L+1.25% to 7.00%
L+4.50% to 11.17%
L+3.75% to 10.63%
10.00%
3M L+4.00%
L+3.75% to 9.25%
3GBP+13.00%
L+2.50% to 8.60%
L+3.10% to 9.12%
L+2.75% to 8.75%
3.38% to 9.00%
L+2.75% to 10.75%
L+7.25%
L+2.25% to 15.25%
7.26%
3.25% to 9.50%
84,497
659,581
136,479
608,148
52,006
46,391
280,297
908,109
59,927
32,539
40,158
62,638
60,781
5,700
602,945
57,467
16,727
90,684
40,749
184,135
25,625
366
932,295
83,424
2,668
16,029
39,865
36,581
96,141
32,934
122,636
68,298
35,022
L+6.75% to 7.04%
8.18%
L+10.15%
3EU+7.25%
L+5.50% to 10.25%
L+11.85%
L+9.75%
L+4.50% to 9.25%
3EU+7.00% to 8.95%
8.72%
188
2022
N/A
2021
N/A
2022
N/A
N/A
2021
N/A 2021-2023
2022
N/A
2023
N/A
2023
2021-2023
N/A 2021-2024
2023
N/A
2023
N/A
2024
N/A
2023
N/A
2021
N/A
2023
N/A
2021
N/A
N/A
2024
N/A 2022-2023
N/A
2021
N/A 2021-2024
2024
N/A
2023
N/A
2021
N/A
2024
N/A
N/A 2021-2023
2023
N/A
2021
N/A
N/A
2023
N/A 2021-2022
N/A 2021-2023
N/A
2021
N/A 2021-2023
2024
N/A
N/A
2021
N/A 2021-2023
N/A 2021-2023
2021
N/A
2022
N/A
2025
N/A
2024
N/A
2021
N/A
N/A
2021
N/A 2020-2022
N/A 2022-2023
N/A
2021
N/A 2030-2049
2021
N/A
2021
N/A
2021
N/A
N/A
2023
N/A 2028-2060
N/A 2021-2022
2024
N/A
2024
N/A
2022
N/A
2021
N/A
2021
N/A
N/A
2022
N/A 2021-2023
N/A 2024-2025
2023
N/A
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
30,874
—
—
8,946
—
184,135
—
—
9,841
—
—
—
—
—
—
—
—
—
—
Description/ Location
Office, West, Floating (4 mortgages) . . . . . . . . . . . . .
Other, West, Floating (2 mortgages) . . . . . . . . . . . . . .
Retail, Midwest, Fixed (2 mortgages) . . . . . . . . . . . . .
Loan Loss Allowance . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Loan Costs, Net . . . . . . . . . . . . . . . . . . . . . .
Prior
Carrying
Face
Liens (1) Amount Amount
N/A
N/A
N/A
—
—
N/A
N/A
N/A
—
—
85,129
60,807
11,977
(61,855)
2,741
$ 10,584,400 (6)
Interest Rate (2)
L+6.24% to 6.67%
L+11.00%
7.16%
N/A 2022-2024
2021
N/A
2024
N/A
Payment Maturity Principal Amount of
Terms (3) Date (4) Delinquent Loans
—
—
11,977
—
—
245,773
$
Notes to Schedule IV:
(1)
(2)
(3)
(4)
(5)
Represents third party priority liens. Third party portions of pari - passu participations are not considered prior liens. Additionally, excludes the outstanding debt on
third party joint ventures of underlying borrowers.
L = one month LIBOR rate, 3M L = three month LIBOR rate, GBP = one month GBP LIBOR rate, 3GBP = three month GBP LIBOR rate, 3EU = three month
EURO LIBOR rate.
I/O = interest only until maturity.
Based on management’s judgment of extension options being exercised.
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.
(6)
The aggregate cost for federal income tax purposes is $10.7 billion.
The following schedule presents activity within our Commercial and Residential Lending Segment and Investing and Servicing
Segment loan portfolios during the years ended December 31, 2020, 2019 and 2018 (amounts in thousands):
For the year ended December 31,
2019
2018
2020
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,890,693 $ 7,806,699 $ 7,357,034
—
Cumulative effect of ASC 326 effective January 1, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,543,873
Acquisitions/originations/additional funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,445
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,082,347)
Basis of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,086,107)
Loan maturities/principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,408
Discount accretion/premium amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40,522
Changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,645)
Unrealized foreign currency translation gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(34,821)
Credit loss provision, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loan foreclosures and other transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to/from other asset classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,663)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,584,400 $ 9,890,693 $ 7,806,699
(10,112)
5,058,705
143,023
(3,246,515)
(1,590,379)
38,942
133,124
102,748
(40,955)
(71,488)
176,614
—
8,174,321
109,978
(3,921,171)
(2,387,843)
29,775
71,601
38,050
(2,616)
(27,303)
(798)
Refer to Note 16 to the Consolidated Financial Statements for a discussion of loan activity with related parties.
189
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. 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
SEC’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.
Management Report on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting. Our internal control over financial
reporting is a process designed under the supervision of our principal executive and principal financial officers to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with accounting principles generally accepted in the United
States of America.
As of December 31, 2020, our management conducted an assessment of the effectiveness of our internal control
over financial reporting based on the framework established in Internal Control—Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this assessment, our
management has concluded that our internal control over financial reporting as of December 31, 2020 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the U.S., and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our
financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report included in this
Form 10 - K, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting
as of December 31, 2020.
Changes to 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 December 31, 2020 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None noted.
190
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Information required by this Item with respect to members of our board of directors and with respect to our
Audit Committee will be contained in the Proxy Statement for the 2021 Annual Meeting of Shareholders (“2021 Proxy
Statement”) under the captions “Election of Directors” and “Board and Committee Meetings—Audit Committee” and in
the chart disclosing Audit Committee membership and is incorporated herein by this reference. Information required by
this Item with respect to our executive officers will be contained in the 2021 Proxy Statement under the caption “Our
Executive Officers,” and is incorporated herein by this reference.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics for all directors, officers and employees of the
Company which is available on our website at http://ir.starwoodpropertytrust.com/govdocs. In addition, stockholders
may request a free copy of the Code of Business Conduct and Ethics from:
Starwood Property Trust, Inc.
Attention: Investor Relations
591 West Putnam Avenue
Greenwich, CT 06830
(202) 422 - 7700
We have also adopted a Code of Ethics for our Principal Executive Officer and Senior Financial Officers setting
forth a code of ethics applicable to our Principal Executive Officer, Principal Financial Officer and Principal Accounting
Officer, which is available on our website at http://ir.starwoodpropertytrust.com/govdocs. Stockholders may request a
free copy of the Code of Ethics for Principal Executive Officer and Senior Financial Officers from the address and phone
number set forth above.
Corporate Governance Guidelines
We have also adopted Corporate Governance Guidelines, which are available on our website at
http://ir.starwoodpropertytrust.com/govdocs. Stockholders may request a free copy of the Corporate Governance
Guidelines from the address and phone number set forth above.
Item 11. Executive Compensation.
Information required by this Item will be contained in the 2021 Proxy Statement under the captions “Executive
Compensation” and “Non-Employee Director Compensation” and is incorporated herein by this reference, provided that
the Compensation Committee Report shall not be deemed to be “filed” with this Form 10 - K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this Item will be contained in the 2021 Proxy Statement under the captions “Security
Ownership of Certain Beneficial Owners, Directors and Management” and “Executive Compensation – Equity
Compensation Plan Information” and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item will be contained in the 2021 Proxy Statement under the captions “Certain
Relationships and Related Transactions” and “How Directors are Selected, Elected and Evaluated—Determination of
Director Independence” and is incorporated herein by this reference.
191
Item 14. Principal Accountant Fees and Services.
Information required by this Item will be contained in the 2021 Proxy Statement under the captions
“Independent Registered Public Accounting Firm” and “Independent Registered Public Accounting Firm – Pre - Approval
Policies for Services of Independent Registered Public Accounting Firm” and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report:
(1) Financial Statements:
See Item 8—“Financial Statements and Supplementary Data”, filed herewith,
for a list of financial statements.
(2) Financial Statement Schedules:
Included within Item 8:
Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loans on Real Estate
(3) Exhibits:
Exhibit No.
Description
2.1 Asset Purchase Agreement, dated August 7, 2018, between Starwood Property Trust, Inc., as buyer, and
GE Capital Global Holdings, LLC, as seller (Incorporated by reference to Exhibit 2.1 of the Company’s
Quarterly Report on Form 10 - Q filed November 9, 2018)
3.1 Articles of Amendment and Restatement of Starwood Property Trust, Inc. (Incorporated by reference to
Exhibit 3.1 of the Company’s Quarterly Report on Form 10 - Q filed November 16, 2009)
3.2 Amended and Restated Bylaws of Starwood Property Trust, Inc., effective as of March 16, 2020
(Incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed March 20,
2020)
4.1
4.2
4.3
4.4
Indenture for Senior Debt Securities between the Company and The Bank of New York Mellon, as trustee
(Incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S - 3 (File
No. 333-210560) filed April 1, 2016)
Fourth Supplemental Indenture, dated as of March 29, 2017, between the Company and The Bank of New
York Mellon, as trustee (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on
Form 8 - K filed March 29, 2017)
Form of 4.375% Convertible Senior Notes due 2023 (Incorporated by reference as Exhibit A to Exhibit 4.2
of the Company’s Current Report on Form 8 - K filed March 29, 2017)
Indenture, dated as of December 16, 2016, between Starwood Property Trust, Inc. and The Bank of New
York Mellon, as trustee (including the form of the Company’s 5.000% Senior Notes due 2021)
(Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8 - K filed
December 21, 2016)
192
Exhibit No.
Description
4.5
4.6
4.7
4.8
4.9
4.10
10.1
Registration Rights Agreement, dated as of December 16, 2016, between Starwood Property Trust, Inc.
and J.P. Morgan Securities LLC, as representative of the initial purchasers (Incorporated by reference to
Exhibit 4.2 of the Company’s Current Report on Form 8 - K filed December 21, 2016)
Indenture, dated as of December 4, 2017, between Starwood Property Trust, Inc. and The Bank of New
York Mellon, as trustee (including the form of Starwood Property Trust, Inc.’s 4.750% Senior Notes due
2025) (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8 - K filed
December 4, 2017)
Registration Rights Agreement, dated as of December 4, 2017, between Starwood Property Trust, Inc. and
J.P. Morgan Securities LLC, as representative of the initial purchasers (Incorporated by reference to
Exhibit 4.2 of the Company’s Current Report on Form 8 - K filed December 4, 2017)
Registration Rights Agreement, dated as of December 28, 2017, among Starwood Property Trust, Inc. and
the persons listed on Schedule I thereto (Incorporated by reference to Exhibit 4.13 of the Company’s
Annual Report on Form 10 - K filed February 28, 2018)
Indenture, dated as of November 2, 2020, between Starwood Property Trust, Inc. and The Bank of New
York Mellon, as trustee (including the form of Starwood Property Trust, Inc.’s 5.500% Senior Notes due
2023) (Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed
November 2, 2020)
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
(Incorporated by reference to Exhibit 4.14 of the Company’s Annual Report on Form 10-K filed
February 25, 2020)
Registration Rights Agreement, dated August 17, 2009, among Starwood Property Trust, Inc., SPT
Investment, LLC and SPT Management, LLC (Incorporated by reference to Exhibit 10.2 of the
Company’s Quarterly Report on Form 10 - Q filed November 16, 2009)
10.2 Management Agreement, dated August 17, 2009, among SPT Management, LLC and Starwood Property
Trust, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10 - Q
filed November 16, 2009)
10.3 Amendment No. 1, dated as of May 7, 2012, to Management Agreement, dated August 17, 2009, as
amended, between Starwood Property Trust, Inc. and SPT Management, LLC (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8 - K filed May 8, 2012)
10.4 Amendment No. 2, dated as of December 4, 2014, to Management Agreement, dated August 17, 2009, as
amended, between Starwood Property Trust, Inc. and SPT Management, LLC (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8 - K filed December 5, 2014)
10.5 Amendment No. 3, dated as of August 4, 2016, to Management Agreement, dated August 17, 2009, as
amended, between Starwood Property Trust, Inc. and SPT Management, LLC (Incorporated by reference
to Exhibit 10.5 of the Company’s Annual Report on Form 10 - K filed February 23, 2017)
10.6 Amendment No. 4, dated February 15, 2018 and effective as of December 28, 2017, to Management
Agreement, dated August 17, 2009, as amended, between Starwood Property Trust, Inc. and SPT
Management, LLC (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on
Form 8-K filed February 22, 2018)
193
Exhibit No.
Description
10.7 Co - Investment and Allocation Agreement, dated August 17, 2009, among Starwood Property Trust, Inc.,
SPT Management, LLC and Starwood Capital Group Global, L.P. (Incorporated by reference to
Exhibit 10.4 of the Company’s Quarterly Report on Form 10 - Q filed November 16, 2009)
10.8 Amendment No. 1, dated as of June 19, 2015, to the Co-Investment and Allocation Agreement, dated as of
August 17, 2009, by and among Starwood Property Trust, Inc., SPT Management, LLC and Starwood
Capital Group Global, L.P. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed June 25, 2015)
10.9 Amendment No. 2, dated as of November 21, 2016, to the Co-Investment and Allocation Agreement,
dated as of August 17, 2009, by and among Starwood Property Trust, Inc., SPT Management, LLC and
Starwood Capital Group Global, L.P. (Incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K filed November 22, 2016)
10.10 Starwood Property Trust, Inc. 2017 Manager Equity Plan (Incorporated by reference to Appendix A of the
Company’s Definitive Proxy Statement on Schedule 14A filed March 31, 2017)*
10.11 Restricted Stock Unit Award Agreement (Starwood Property Trust, Inc. 2017 Manager Equity Plan)
(Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed
November 8, 2019)*
10.12 Starwood Property Trust, Inc. 2017 Equity Plan (Incorporated by reference to Appendix B of the
Company’s Definitive Proxy Statement on Schedule 14A filed March 31, 2017)*
10.13 Form of Restricted Stock Award Agreement for Independent Directors (Starwood Property Trust, Inc.
2017 Equity Plan) (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on
Form 10-Q filed November 8, 2019)*
10.14 Form of Restricted Stock Award Agreement (Starwood Property Trust, Inc. 2017 Equity Plan)
(Incorporated by reference to Exhibit 10.7 of the Company’s Quarterly Report on Form 10-Q filed May 8,
2019)*
10.15 Uncommitted Master Repurchase Agreement, dated as of December 10, 2015, by and among Starwood
Property Mortgage Sub-14, L.L.C., Starwood Property Mortgage Sub-14-A, L.L.C. and JPMorgan Chase
Bank, National Association (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 16, 2015)
10.16 First through Eighth Amendments to Uncommitted Master Repurchase Agreement by and among
JPMorgan Chase Bank, National Association, Starwood Property Mortgage Sub-14, L.L.C., Starwood
Property Mortgage Sub-14-A, L.L.C., Starwood Mortgage Funding VI LLC and SPT CA Fundings 2, LLC
(Incorporated by reference to Exhibit 10.16 of the Company’s Annual Report on Form 10-K filed
February 25, 2020)
10.17 Form of Indemnification Agreement for Directors and Officers (Incorporated by reference to Exhibit 10.23
of the Company’s Annual Report on Form 10-K filed February 25, 2016)*
10.18 Tax Protection Agreement, dated as of December 28, 2017, among SPT Dolphin Intermediate LLC, SPT
Dolphin Parent LLC and the persons listed on Annex A thereto (Incorporated by reference to Exhibit
10.17 of the Company’s Annual Report on Form 10-K filed February 28, 2018)
194
Exhibit No.
Description
10.19 Amended and Restated Advances, Collateral Pledge and Security Agreement, dated as of July 7, 2017,
between the Federal Home Loan Bank of Chicago (“FHLB”) and Prospect Mortgage Insurance, LLC
(“PMI”) (the “Amended and Restated Advances, Collateral Pledge and Security Agreement”)
(Incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed May 8,
2019)
10.20 Supplement to Amended and Restated Advances, Collateral Pledge and Security Agreement, dated as of
July 7, 2017, among PMI, SMRF Trust III (the “SMRF Trust III”), SMRF Trust III-A (“SMRF Trust III-
A”, and together with SMRF Trust III, the “Trusts”), Wilmington Trust, National Association, solely as
Delaware Trustee of the Trusts, and the FHLB (the “Supplement to Amended and Restated Advances,
Collateral Pledge and Security Agreement”) (Incorporated by reference to Exhibit 10.3 of the Company’s
Quarterly Report on Form 10-Q filed May 8, 2019)
10.21 Letter Agreement, dated March 15, 2019, between PMI and FHLB supplementing the Amended and
Restated Advances, Collateral Pledge and Security Agreement dated July 7, 2017 and the Supplement to
Amended and Restated Advances, Collateral Pledge and Security Agreement dated July 7, 2017, between
PMI and the FHLB (Incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on
Form 10-Q filed May 8, 2019)
10.22 Sixth Amended and Restated Master Repurchase and Securities Contract, dated as of April 10, 2019,
among Starwood Property Mortgage Sub-2, L.L.C., Starwood Property Mortgage Sub-2-A, L.L.C. and
SPT CA Fundings 2, LLC, as sellers, and Wells Fargo, National Association, as buyer (Incorporated by
reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed May 8, 2019)
10.23
Indenture, dated as of August 15, 2019, by and among STWD 2019-FL1, Ltd., as Issuer, STWD
2019-FL1, LLC, as Co-Issuer, Starwood Property Mortgage, L.L.C., as Advancing Agent, Wilmington
Trust, National Association, as Trustee, and Wells Fargo Bank, National Association, as Note
Administrator and Custodian (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed August 21, 2019)
10.24 Second Amended and Restated Guaranty, dated November 22, 2019, made by Starwood Property Trust,
Inc. in favor of the FHLB (Incorporated by reference to Exhibit 10.24 of the Company’s Annual Report on
Form 10-K filed February 25, 2020)
10.25 Fifth Amended and Restated Guarantee and Security Agreement, dated as of April 10, 2019, made by
Starwood Property Trust, Inc. in favor of Wells Fargo Bank, National Association (Incorporated by
reference to Exhibit 10.25 of the Company’s Annual Report on Form 10-K filed February 25, 2020)
10.26 Guarantee Agreement and First and Second Amendments thereto made by Starwood Property Trust, Inc.
in favor of JPMorgan Chase Bank, National Association (Incorporated by reference to Exhibit 10.26 of the
Company’s Annual Report on Form 10-K filed February 25, 2020)
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes - Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
32.2 Certification pursuant to Section 906 of the Sarbanes - Oxley Act of 2002
101.INS XBRL Instance Document – the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
195
Exhibit No.
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Description
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Indicates management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary.
None.
196
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: February 25, 2021
Starwood Property Trust, Inc.
By:
/s/ BARRY S. STERNLICHT
Barry S. Sternlicht
Chief Executive Officer and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
Date: February 25, 2021
/s/ BARRY S. STERNLICHT
Barry S. Sternlicht
Chief Executive Officer and Chairman of the Board of
Directors (Principal Executive Officer)
/s/ RINA PANIRY
Rina Paniry
Chief Financial Officer, Treasurer, Chief Accounting
Officer and Principal Financial Officer
/s/ RICHARD D. BRONSON
Richard D. Bronson
Director
/s/ JEFFREY G. DISHNER
Jeffrey G. Dishner
Director
/s/ CAMILLE J. DOUGLAS
Camille J. Douglas
Director
/s/ SOLOMON J. KUMIN
Solomon J. Kumin
Director
/s/ FRED PERPALL
Fred Perpall
Director
/s/ FRED S. RIDLEY
Fred S. Ridley
Director
/s/ STRAUSS ZELNICK
Strauss Zelnick
Director
By:
By:
By:
By:
By:
By:
By:
By:
By:
197
1200 K Street, Washington, DC
Porthaven Care Home, Cheshire, UK
Magna Park, Lutterworth, UK
Juhl, Las Vegas, NV
Vista Pointe, Irving, TX
The Overlook at St. Gabriel’s, Brighton, MA
California Market Center, Los Angeles, CA
200 Stovall Street, Alexandria, VA
Triton Towers, Renton, WA
Datasite, Orlando, FL
Watermarque Building, Dublin, Ireland
Omega at Bonita Bay, Bonita Springs, FL
Getaway Big Bear, Running Springs, CA
Castlehill Wood, Belfast, Ireland
Yours Truly DC, Washington, DC
Lakeshore, Irvine, CA
Turnberry Ocean Club Residences, Sunny Isles Beach, FL
Skyline Tower, Long Island City, NY
Burlingame Point, Burlingame, CA
Kings Cross, Fayetteville, NC
Parkgate, Dublin, Ireland
11 Hoyt, Brooklyn, NY
Nine Lanyon Place, Belfast, Ireland
1213 Walnut, Philadelphia, PA
Uptown 500, Wheeling, IL
88 Froelich, Woodbury, NY
2020
ANNUAL
REPORT
starwoodpropertytrust.com
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TERMINI, SANDYFORD, IRELAND
€58.7m First Mortgage