Notes to Condensed Consolidated Financial Statements
As of March 31, 2023
(Unaudited)
1. Business and Organization
Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering. We are focused primarily on originating, acquiring, financing and managing mortgage loans and other real estate investments in the United States (“U.S.”), Europe and Australia. 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 March 31, 2023 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 the U.S., Europe and Australia (including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on residential property and primarily consist of non-agency residential 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 Global L.P., a privately-held private equity firm founded by Mr. Sternlicht.
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 condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.
These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (our “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results for the full year.
Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, (iii) became significant since December 31, 2022 due to a corporate action or increase in the significance of the underlying business activity or (iv) changed upon adoption of an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”).
Variable Interest Entities
In addition to the securitization VIEs, we have financed pools of our loans through collateralized loan obligations (“CLOs”) and a single asset securitization (“SASB”), which are considered VIEs. 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 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 condensed consolidated statements of operations. The residual difference shown on our condensed consolidated statements of operations in the line item “Change in net assets related to consolidated VIEs” represents our beneficial interest in the VIEs.
We separately present the assets and liabilities of our consolidated securitization VIEs as individual line items on our condensed consolidated balance sheets. The liabilities of our consolidated securitization VIEs consist solely of obligations to the bondholders of the related 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 Standard Update (“ASU”) 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.
Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as opposed to its fair value. However, as a pool, the fair value of the assets in total is equal to the fair value of the liabilities.
For these reasons, the assets of our securitization VIEs are presented in the aggregate.
Fair Value Option
The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.
We have elected the fair value option for 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, investments of consolidated affordable housing fund, 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.
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 condensed 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” methodology. The CECL model applies to our HFI loans and our HTM debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities. However, as permitted by ASC 326, we have elected not to measure an allowance for credit losses on accrued interest receivable (which is classified separately on our condensed consolidated balance sheets), but rather write off in a timely manner by reversing interest income and/or cease accruing interest that would likely be uncollectible.
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 4 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.
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.
Investments of Consolidated Affordable Housing Fund
On November 5, 2021, we established Woodstar Portfolio Holdings, LLC (the “Woodstar Fund”), an investment fund which holds our Woodstar multifamily affordable housing portfolios consisting of 59 properties with 15,057 units located in Central and South Florida. As managing member of the Woodstar Fund, we manage interests purchased by third party investors seeking capital appreciation and an ongoing return, for which we earn (i) a management fee based on each investor’s share of total Woodstar Fund equity; and (ii) an incentive distribution if the Woodstar Fund’s returns exceed an established threshold. In connection with the establishment of the Woodstar Fund, we entered into subscription and other related agreements with certain third party institutional investors to sell, through a feeder fund structure, an aggregate 20.6% interest in the Woodstar Fund for an initial aggregate subscription price of $216.0 million, which was adjusted to $214.2 million post-closing. The Woodstar Fund has an initial term of eight years.
Effective with the third party interest sale, the Woodstar Fund has the characteristics of an investment company under ASC 946, Financial Services – Investment Companies. Accordingly, the Woodstar Fund is required to carry the investments in its properties at fair value, with a cumulative effect adjustment between the fair value and previous carrying value of its investments recognized in stockholders’ equity as of November 5, 2021, the date of the Woodstar Fund’s change in status to an investment company. Because we are the primary beneficiary of the Woodstar Fund, which is a VIE (as discussed in Note 15), we consolidate the accounts of the Woodstar Fund into our consolidated financial statements, retaining the fair value basis of accounting for its investments. Realized and unrealized changes in the fair value of the Woodstar Fund’s property investments, and distributions thereon, are recognized in the “Income from affordable housing fund investments” caption within the other income (loss) section of our condensed consolidated statements of operations. See Note 7 for further details regarding the Woodstar Fund’s investments and related income and Note 17 with respect to its contingently redeemable non-controlling interests which are classified as “Temporary Equity” in our condensed 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).
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.
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. 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 condensed consolidated statements of operations.
Earnings Per Share
We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock awards (“RSAs”) and restricted stock units (“RSUs and any outstanding discounted share purchase options under the Employee Stock Purchase Program (“ESPP”) , (ii) shares contingently issuable to our Manager, (iii) the conversion options associated with our senior convertible notes (the “Convertible Notes”) (see Notes 11 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 three months ended March 31, 2023 and 2022, the two-class method resulted in the most dilutive EPS calculation.
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 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. Amounts ultimately realized from our investments may vary significantly from the fair values presented.
We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2023. 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, 2024, as extended by ASU 2022-06, Deferral of the Sunset Date of Topic 848, issued by the FASB on December 21, 2022. The Company has not adopted any of the optional expedients or exceptions through March 31, 2023.
3. Acquisitions and Divestitures
Investing and Servicing Segment Property Portfolio (“REIS Equity Portfolio”)
During the three months ended March 31, 2023, there were no material sales of property within the REIS Equity Portfolio. During the three months ended March 31, 2022, we sold an operating property for $34.5 million. In connection with this sale, we recognized a gain of $11.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.
Commercial and Residential Lending Segment
During the three months ended March 31, 2023, there were no sales of property within the Commercial and Residential Lending Segment. During the three months ended March 31, 2022, we sold a distribution facility located in Orlando, Florida that was previously acquired in April 2019 through foreclosure of a loan with a carrying value of $18.5 million. The property was sold for $114.8 million and we recognized a gain of $86.6 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.
During the three months ended March 31, 2023 and 2022, we had no significant acquisitions of properties or businesses.
4. Loans
Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option for either. The following tables summarize our investments in mortgages and loans as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | Carrying
Value | | Face
Amount | | Weighted
Average
Coupon (1) | | Weighted
Average Life
(“WAL”)
(years)(2) | |
| Loans held-for-investment: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| First mortgages (3) | $ | 15,610,218 | | | $ | 15,684,751 | | | 8.4 | % | | 1.6 | |
| Subordinated mortgages (4) | 72,379 | | | 73,244 | | | 14.1 | % | | 1.5 | |
| Mezzanine loans (3) | 472,404 | | | 469,176 | | | 13.2 | % | | 1.1 | |
| Other | 58,071 | | | 58,927 | | | 8.2 | % | | 1.2 | |
| Total commercial loans | 16,213,072 | | | 16,286,098 | | | | | | |
| Infrastructure first priority loans | 2,373,782 | | | 2,405,700 | | | 9.1 | % | | 3.9 | |
| | | | | | | | |
| Total loans held-for-investment | 18,586,854 | | | 18,691,798 | | | | | | |
| Loans held-for-sale: | | | | | | | | |
| Residential, fair value option | 2,733,358 | | | 3,054,552 | | | 4.5 | % | | N/A | (5) |
| Commercial, fair value option | 77,531 | | | 85,450 | | | 6.0 | % | | 9.5 | |
| | | | | | | | |
| Total loans held-for-sale | 2,810,889 | | | 3,140,002 | | | | | | |
| Total gross loans | 21,397,743 | | | $ | 21,831,800 | | | | | | |
| Credit loss allowances: | | | | | | | | |
| Commercial loans held-for-investment | (118,479) | | | | | | | | |
| Infrastructure loans held-for-investment | (15,951) | | | | | | | | |
| Total allowances | (134,430) | | | | | | | | |
| Total net loans | $ | 21,263,313 | | | | | | | | |
| | | | | | | | |
| December 31, 2022 | | | | | | | | |
| Loans held-for-investment: | | | | | | | | |
| Commercial loans: | | | | | | | | |
| First mortgages (3) | $ | 15,562,452 | | | $ | 15,648,358 | | | 7.9 | % | | 1.7 | |
| Subordinated mortgages (4) | 71,100 | | | 72,118 | | | 13.6 | % | | 1.8 | |
| Mezzanine loans (3) | 445,363 | | | 442,339 | | | 12.9 | % | | 1.0 | |
| Other | 58,393 | | | 59,393 | | | 8.2 | % | | 1.4 | |
| Total commercial loans | 16,137,308 | | | 16,222,208 | | | | | | |
| Infrastructure first priority loans | 2,363,544 | | | 2,395,762 | | | 8.6 | % | | 3.9 | |
| | | | | | | | |
| Total loans held-for-investment | 18,500,852 | | | 18,617,970 | | | | | | |
| Loans held-for-sale: | | | | | | | | |
| Residential, fair value option | 2,763,458 | | | 3,092,915 | | | 4.5 | % | | N/A | (5) |
| Commercial, fair value option | 21,136 | | | 23,900 | | | 5.7 | % | | 8.6 | |
| | | | | | | | |
| Total loans held-for-sale | 2,784,594 | | | 3,116,815 | | | | | | |
| Total gross loans | 21,285,446 | | | $ | 21,734,785 | | | | | | |
| Credit loss allowances: | | | | | | | | |
| Commercial loans held-for-investment | (88,801) | | | | | | | | |
| Infrastructure loans held-for-investment | (10,612) | | | | | | | | |
| Total allowances | (99,413) | | | | | | | | |
| Total net loans | $ | 21,186,033 | | | | | | | | |
______________________________________________________________________________________________________________________
(1)Calculated using applicable index rates as of March 31, 2023 and December 31, 2022 for variable rate loans and excludes loans for which interest income is not recognized.
(2)Represents the WAL of each respective group of loans, excluding loans for which interest income is not recognized, as of the respective balance sheet date. The WAL of each individual loan is calculated using amounts and timing of future principal payments, as projected at origination or acquisition.
(3)First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of $1.3 billion being classified as first mortgages as of both March 31, 2023 and December 31, 2022.
(4)Subordinated mortgages include B-Notes and junior participation in first mortgages where we do not own the senior A-Note or senior participation. If we own both the A-Note and B-Note, we categorize the loan as a first mortgage loan.
(5)Residential loans have a weighted average remaining contractual life of 28.5 years and 28.8 years as of March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023, our variable rate loans held-for-investment, excluding loans for which interest income is not recognized, were as follows (dollars in thousands):
| | | | | | | | | | | |
| March 31, 2023 | Carrying
Value | | Weighted-average
Spread Above Index |
| Commercial loans | $ | 15,526,655 | | | 4.0 | % |
| Infrastructure loans | 2,360,875 | | | 4.0 | % |
| Total variable rate loans held-for-investment | $ | 17,887,530 | | | 4.0 | % |
Credit Loss Allowances
As discussed in Note 2, we do not have a history of realized credit losses on our HFI loans and HTM securities, so we have subscribed to third party database services to provide us with industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios.
For our commercial loans, we utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading CMBS data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-stabilized-value (“LTV”) and debt service coverage ratio (DSCR) metrics, as well as principal balances, property type, location, coupon, origination year, term, subordination, expected repayment dates and future fundings. We also select from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our commercial loans, as set forth in the credit quality indicator table below. A lower LTV ratio typically indicates a lower credit loss risk.
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. For instance, although the office sector has been adversely affected by the increase in remote working arrangements and the retail sector has been adversely affected by electronic commerce, the broad macroeconomic forecasts do not account for such differentiation. Accordingly, we have selected a more adverse macroeconomic recovery forecast related to office and retail properties 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 principally 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.
The significant credit quality indicators for our loans measured at amortized cost, which excludes loans held-for-sale, were as follows as of March 31, 2023 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans
Amortized Cost Basis by Origination Year | | Revolving Loans
Amortized Cost
Total | | Total
Amortized
Cost Basis | | Credit
Loss
Allowance |
| As of March 31, 2023 | | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | | |
| Commercial loans: | | | | | | | | | | | | | | | | | | |
| Credit quality indicator: | | | | | | | | | | | | | | | | | | |
| LTV < 60% | | $ | — | | | $ | 1,923,695 | | | $ | 2,893,448 | | | $ | 209,003 | | | $ | 1,049,495 | | | $ | 806,693 | | | $ | — | | | $ | 6,882,334 | | | $ | 11,562 | |
| LTV 60% - 70% | | — | | | 1,891,000 | | | 3,732,239 | | | 177,795 | | | 852,640 | | | 550,494 | | | — | | | 7,204,168 | | | 45,830 | |
| LTV > 70% | | 42,443 | | | 102,019 | | | 479,021 | | | 416,130 | | | 478,570 | | | 545,391 | | | — | | | 2,063,574 | | | 56,162 | |
| Credit deteriorated | | — | | | — | | | — | | | — | | | — | | | 4,925 | | | — | | | 4,925 | | | 4,925 | |
| Defeased and other | | — | | | 42,138 | | | — | | | — | | | — | | | 15,933 | | | — | | | 58,071 | | | — | |
| Total commercial | | $ | 42,443 | | | $ | 3,958,852 | | | $ | 7,104,708 | | | $ | 802,928 | | | $ | 2,380,705 | | | $ | 1,923,436 | | | $ | — | | | $ | 16,213,072 | | | $ | 118,479 | |
| Infrastructure loans: | | | | | | | | | | | | | | | | | | |
| Credit quality indicator: | | | | | | | | | | | | | | | | | | |
| Power | | $ | — | | | $ | 89,428 | | | $ | 208,091 | | | $ | 83,415 | | | $ | 284,346 | | | $ | 733,327 | | | $ | 18,677 | | | $ | 1,417,284 | | | $ | 4,304 | |
| Oil and gas | | 108,732 | | | 108,040 | | | 355,589 | | | — | | | 185,551 | | | 134,776 | | | 2,008 | | | 894,696 | | | 4,721 | |
| Other | | 48,895 | | | — | | | — | | | — | | | — | | | — | | | — | | | 48,895 | | | 202 | |
| Credit deteriorated | | — | | | — | | | — | | | — | | | — | | | 12,907 | | | — | | | 12,907 | | | 6,724 | |
| Total infrastructure | | $ | 157,627 | | | $ | 197,468 | | | $ | 563,680 | | | $ | 83,415 | | | $ | 469,897 | | | $ | 881,010 | | | $ | 20,685 | | | $ | 2,373,782 | | | $ | 15,951 | |
| | | | | | | | | | | | | | | | | | |
| Loans held-for-sale | | | | | | | | | | | | | | | | 2,810,889 | | | — | |
| Total gross loans | | | | | | | | | | | | | | | | $ | 21,397,743 | | | $ | 134,430 | |
Non-Credit Deteriorated Loans
As of March 31, 2023, we had the following loans with a combined amortized cost basis of $280.4 million that were 90 days or greater past due at March 31, 2023: (i) a $156.4 million mortgage loan on an office complex in Brooklyn, New York; (ii) a $41.6 million mortgage loan on the retail portion of a hotel located in Chicago; (iii) a $37.8 million leasehold mortgage loan on a luxury resort in California destroyed by wildfire; (iv) $35.4 million of residential loans; and (v) a $9.2 million loan on a hospitality asset in New York City that our Investing and Servicing Segment acquired as nonperforming in October 2021. All of these loans were on nonaccrual as of March 31, 2023 with the exception of (i).
We also had the following loans on nonaccrual that were not 90 days or greater past due as of March 31, 2023: (i) a $216.6 million senior loan on a retail and entertainment project in New Jersey, of which $7.3 million was previously converted into equity interests (see Note 8); and (ii) a $120.8 million senior mortgage loan on an office building in Washington, DC. None of these loans are considered credit deteriorated as we presently expect to recover all amounts due.
Credit Deteriorated Loans
As of March 31, 2023, we had a $12.9 million infrastructure loan participation collateralized by a first priority lien on two natural gas fired power plants near Chicago for which we provided a $6.7 million specific credit loss allowance during the three months ended March 31, 2023. The loan participation was deemed credit deteriorated when the borrower filed for bankruptcy. We also had a $4.9 million commercial subordinated loan secured by a department store in Chicago which was deemed credit deteriorated and was fully reserved in prior years. Both loans are on nonaccrual under the cost recovery method.
The following tables present the activity in our credit loss allowance for funded loans and unfunded commitments (amounts in thousands):
| | | | | | | | | | | | | | | | | |
| Funded Commitments Credit Loss Allowance |
| Loans Held-for-Investment | | Total
Funded Loans |
Three Months Ended March 31, 2023 | Commercial | | Infrastructure | |
| Credit loss allowance at December 31, 2022 | $ | 88,801 | | | $ | 10,612 | | | $ | 99,413 | |
| Credit loss provision, net | 29,678 | | | 5,339 | | | 35,017 | |
| | | | | |
| | | | | |
| | | | | |
| Credit loss allowance at March 31, 2023 | $ | 118,479 | | | $ | 15,951 | | | $ | 134,430 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Unfunded Commitments Credit Loss Allowance (1) |
| Loans Held-for-Investment | | | | | | |
Three Months Ended March 31, 2023 | Commercial | | Infrastructure | | | | CMBS (2) | | Total |
| Credit loss allowance at December 31, 2022 | $ | 9,749 | | | $ | 72 | | | | | $ | 52 | | | $ | 9,873 | |
| Credit loss provision (reversal), net | 1,145 | | | (11) | | | | | (15) | | | 1,119 | |
| Credit loss allowance at March 31, 2023 | $ | 10,894 | | | $ | 61 | | | | | $ | 37 | | | $ | 10,992 | |
Memo: Unfunded commitments as of March 31, 2023 (3) | $ | 1,956,436 | | | $ | 15,500 | | | | | $ | 33,523 | | | $ | 2,005,459 | |
______________________________________________________________________________________________________________________
(1)Included in accounts payable, accrued expenses and other liabilities in our consolidated balance sheets.
(2)See Note 5 for further details.
(3)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 | | | | | |
Three Months Ended March 31, 2023 | | Commercial | | Infrastructure | | Residential | | Held-for-Sale Loans | | Total Loans | |
| Balance at December 31, 2022 | | $ | 16,048,507 | | | $ | 2,352,932 | | | $ | — | | | $ | 2,784,594 | | | $ | 21,186,033 | | |
| Acquisitions/originations/additional funding | | 259,113 | | | 172,502 | | | — | | | 69,200 | | | 500,815 | | |
| Capitalized interest (1) | | 27,924 | | | 130 | | | — | | | — | | | 28,054 | | |
| Basis of loans sold (2) | | — | | | — | | | — | | | (13,439) | | | (13,439) | | |
| Loan maturities/principal repayments | | (256,644) | | | (165,323) | | | — | | | (38,367) | | | (460,334) | | |
| Discount accretion/premium amortization | | 12,551 | | | 2,629 | | | — | | | — | | | 15,180 | | |
| Changes in fair value | | — | | | — | | | — | | | 8,901 | | | 8,901 | | |
| Foreign currency translation gain, net | | 32,820 | | | 300 | | | — | | | — | | | 33,120 | | |
| Credit loss provision, net | | (29,678) | | | (5,339) | | | — | | | — | | | (35,017) | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance at March 31, 2023 | | $ | 16,094,593 | | | $ | 2,357,831 | | | $ | — | | | $ | 2,810,889 | | | $ | 21,263,313 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Held-for-Investment Loans | | | | | |
Three Months Ended March 31, 2022 | | Commercial | | Infrastructure | | Residential | | Held-for-Sale Loans | | Total Loans | |
| Balance at December 31, 2021 | | $ | 13,450,198 | | | $ | 2,027,426 | | | $ | 59,225 | | | $ | 2,876,800 | | | $ | 18,413,649 | | |
| Acquisitions/originations/additional funding | | 1,359,483 | | | 198,338 | | | — | | | 2,266,699 | | | 3,824,520 | | |
| Capitalized interest (1) | | 26,697 | | | 113 | | | — | | | 93 | | | 26,903 | | |
| Basis of loans sold (2) | | — | | | — | | | — | | | (2,278,467) | | | (2,278,467) | | |
| Loan maturities/principal repayments | | (715,665) | | | (91,853) | | | (1,995) | | | (56,439) | | | (865,952) | | |
| Discount accretion/premium amortization | | 14,093 | | | 2,507 | | | — | | | — | | | 16,600 | | |
| Changes in fair value | | — | | | — | | | (1,263) | | | (124,520) | | | (125,783) | | |
| Foreign currency translation loss, net | | (71,909) | | | (802) | | | — | | | — | | | (72,711) | | |
| Credit loss (provision) reversal, net | | (1,379) | | | 389 | | | — | | | — | | | (990) | | |
| | | | | | | | | | | |
| Transfer to/from other asset classifications or between segments | | — | | | — | | | (346) | | | 346 | | | — | | |
| Balance at March 31, 2022 | | $ | 14,061,518 | | | $ | 2,136,118 | | | $ | 55,621 | | | $ | 2,684,512 | | | $ | 18,937,769 | | |
______________________________________________________________________________________________________________________
(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.
5. Investment Securities
Investment securities were comprised of the following as of March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | |
| Carrying Value as of |
| March 31, 2023 | | December 31, 2022 |
| RMBS, available-for-sale | $ | 111,069 | | | $ | 113,386 | |
| RMBS, fair value option (1) | 427,629 | | | 423,183 | |
| CMBS, fair value option (1), (2) | 1,247,152 | | | 1,262,846 | |
HTM debt securities, amortized cost net of credit loss allowance of $10,240 and $3,182 | 632,739 | | | 673,470 | |
| Equity security, fair value | 10,134 | | | 9,840 | |
Subtotal—Investment securities | 2,428,723 | | | 2,482,725 | |
| VIE eliminations (1) | (1,655,836) | | | (1,666,921) | |
| Total investment securities | $ | 772,887 | | | $ | 815,804 | |
______________________________________________________________________________________________________________________
(1)Certain fair value option CMBS and RMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810.
(2)Includes $197.0 million and $198.9 million of non-controlling interests in the consolidated entities which hold certain of these CMBS as of March 31, 2023 and December 31, 2022, respectively.
Purchases, sales, principal collections and redemptions for all investment securities were as follows (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| RMBS,
available-for-sale | | RMBS, fair
value option | | CMBS, fair
value option | | HTM
Securities | | Securitization
VIEs (1) | | Total |
Three Months Ended March 31, 2023 | | | | | | | | | | | |
| Purchases/fundings | $ | — | | | $ | — | | | $ | — | | | $ | 591 | | | $ | — | | | $ | 591 | |
| Sales | — | | | — | | | — | | | — | | | — | | | — | |
| Principal collections | 2,435 | | | 14,220 | | | 1,254 | | | 38,198 | | | (15,329) | | | 40,778 | |
| | | | | | | | | | | |
Three Months Ended March 31, 2022 | | | | | | | | | | | |
| Purchases | $ | — | | | $ | 84,357 | | | $ | — | | | $ | 18,139 | | | $ | (84,357) | | | $ | 18,139 | |
| Sales | — | | | — | | | — | | | | | — | | | — | |
| Principal collections | 6,895 | | | 21,604 | | | 635 | | | 664 | | | (22,014) | | | 7,784 | |
| | | | | | | | | | | |
_________________________________________________________________________________________________________________(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 March 31, 2023 and December 31, 2022. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).
The tables below summarize various attributes of our investments in available-for-sale RMBS as of March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Unrealized Gains or (Losses)
Recognized in AOCI | | |
| Amortized
Cost | | Credit
Loss
Allowance | | Net
Basis | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Net
Fair Value
Adjustment | | Fair Value |
| March 31, 2023 | | | | | | | | | | | | | |
| RMBS | $ | 91,218 | | | $ | — | | | $ | 91,218 | | | $ | 21,697 | | | $ | (1,846) | | | $ | 19,851 | | | $ | 111,069 | |
| December 31, 2022 | | | | | | | | | | | | | |
| RMBS | $ | 92,431 | | | $ | — | | | $ | 92,431 | | | $ | 21,765 | | | $ | (810) | | | $ | 20,955 | | | $ | 113,386 | |
| | | | | | | | | | | |
| Weighted Average Coupon (1) | | WAL
(Years) (2) |
| March 31, 2023 | | | |
| RMBS | 5.2 | % | | 7.3 |
______________________________________________________________________________________________________________________
(1)Calculated using the March 31, 2023 LIBOR rate of 4.858% for floating rate securities.
(2)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 March 31, 2023, approximately $97.7 million, or 88%, 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 $0.2 million and $0.3 million for the three months ended March 31, 2023 and 2022, recorded as management fees in the accompanying condensed consolidated statements of operations.
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 March 31, 2023 and December 31, 2022, and for which an allowance for credit losses has not been recorded (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Estimated Fair Value | | Unrealized Losses |
| Securities with a
loss less than
12 months | | Securities with a
loss greater than
12 months | | Securities with a
loss less than
12 months | | Securities with a
loss greater than
12 months |
| As of March 31, 2023 | | | | | | | |
| RMBS | $ | 12,818 | | | $ | 2,205 | | | $ | (1,241) | | | $ | (605) | |
| As of December 31, 2022 | | | | | | | |
| RMBS | $ | 6,961 | | | $ | 1,889 | | | $ | (502) | | | $ | (308) | |
As of March 31, 2023 and December 31, 2022, there were eleven securities and ten securities, respectively, with unrealized losses reflected in the table above. After evaluating the securities, we concluded that the 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, if any, 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 March 31, 2023, 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 March 31, 2023, 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 $427.6 million and $326.3 million, respectively. The $1.7 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 $18.9 million at March 31, 2023) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option investment securities.
As of March 31, 2023, $97.2 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 March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost Basis | | Credit Loss
Allowance | | Net Carrying
Amount | | Gross Unrealized
Holding Gains | | Gross Unrealized
Holding Losses | | Fair Value |
| March 31, 2023 | | | | | | | | | | | |
| CMBS | $ | 581,525 | | | $ | (154) | | | $ | 581,371 | | | $ | 95 | | | $ | (30,190) | | | $ | 551,276 | |
| Preferred interests | 30,527 | | | — | | | 30,527 | | | 125 | | | (5,424) | | | 25,228 | |
| Infrastructure bonds | 30,927 | | | (10,086) | | | 20,841 | | | 37 | | | (22) | | | 20,856 | |
| Total | $ | 642,979 | | | $ | (10,240) | | | $ | 632,739 | | | $ | 257 | | | $ | (35,636) | | | $ | 597,360 | |
| | | | | | | | | | | |
| December 31, 2022 | | | | | | | | | | | |
| CMBS | $ | 577,681 | | | $ | (172) | | | $ | 577,509 | | | $ | 30 | | | $ | (30,424) | | | $ | 547,115 | |
| Preferred interests | 29,757 | | | — | | | 29,757 | | | 125 | | | (4,863) | | | 25,019 | |
| Infrastructure bonds | 69,214 | | | (3,010) | | | 66,204 | | | 47 | | | (1,110) | | | 65,141 | |
| Total | $ | 676,652 | | | $ | (3,182) | | | $ | 673,470 | | | $ | 202 | | | $ | (36,397) | | | $ | 637,275 | |
The following table presents the activity in our credit loss allowance for HTM debt securities (amounts in thousands):
| | | | | | | | | | | | | | | | | | | |
| CMBS | | | | Infrastructure
Bonds | | Total HTM
Credit Loss
Allowance |
Three Months Ended March 31, 2023 | | | | | | | |
| Credit loss allowance at December 31, 2022 | $ | 172 | | | | | $ | 3,010 | | | $ | 3,182 | |
| Credit loss (reversal) provision, net | (18) | | | | | 7,076 | | | 7,058 | |
| Credit loss allowance at March 31, 2023 | $ | 154 | | | | | $ | 10,086 | | | $ | 10,240 | |
The table below summarizes the maturities of our HTM debt securities by type as of March 31, 2023 (amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| CMBS | | Preferred
Interests | | Infrastructure
Bonds | | Total |
| Less than one year | $ | 339,465 | | | $ | 30,527 | | | $ | — | | | $ | 369,992 | |
| One to three years | 190,459 | | | — | | | — | | | 190,459 | |
| Three to five years | 51,447 | | | — | | | 11,727 | | | 63,174 | |
| Thereafter | — | | | — | | | 9,114 | | | 9,114 | |
| Total | $ | 581,371 | | | $ | 30,527 | | | $ | 20,841 | | | $ | 632,739 | |
During the three months ended March 31, 2023, we provided an additional $7.2 million specific credit loss allowance, bringing the total to $10.0 million, on a $19.2 million infrastructure bond that is collateralized by a first priority lien on a coal-fired power plant in Mississippi. It was deemed credit deteriorated when we acquired the Infrastructure Lending Segment in 2018. It has now been placed on nonaccrual under the cost recovery method due to a forbearance and restructuring plan recently agreed between the lenders and borrower that was necessitated by operating shortfalls at the plant.
Equity Security, Fair Value
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 $10.1 million and $9.8 million as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023, our shares represent an approximate 2% interest in SEREF.
6. Properties
Our properties are held within the following portfolios:
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 $770.8 million and debt of $596.9 million as of March 31, 2023.
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 $193.4 million as of March 31, 2023.
Investing and Servicing Segment Property Portfolio
The REIS Equity Portfolio is comprised of 10 commercial real estate properties and one equity interest in an unconsolidated commercial real estate property which were acquired from CMBS trusts over time. The REIS Equity Portfolio includes total gross properties and lease intangibles of $186.3 million and debt of $129.8 million as of March 31, 2023.
Commercial and Residential Lending Segment Property Portfolio
The Commercial and Residential Lending Segment Portfolio represents properties acquired through loan foreclosure or exercise of control over a mezzanine loan borrower’s pledged equity interests. This portfolio includes total gross properties and lease intangibles of $481.3 million and debt of $204.4 million as of March 31, 2023.
Woodstar Portfolios
Refer to Note 7 for a discussion of our Woodstar I and Woodstar II Portfolios which are not included in the table below.
The table below summarizes our properties held as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Depreciable Life | | March 31, 2023 | | December 31, 2022 |
| Property Segment | | | | | |
| Land and land improvements | 0 - 15 years | | $ | 176,006 | | | $ | 176,029 | |
| Buildings and building improvements | 0 - 45 years | | 858,880 | | | 856,411 | |
| Furniture & fixtures | 3 - 5 years | | 530 | | | 446 | |
| Investing and Servicing Segment | | | | | |
| Land and land improvements | 0 - 15 years | | 34,565 | | | 34,613 | |
| Buildings and building improvements | 3 - 40 years | | 122,138 | | | 122,384 | |
| Furniture & fixtures | 2 - 5 years | | 3,250 | | | 3,207 | |
| Commercial and Residential Lending Segment | | | | | |
| Land and land improvements | N/A | | 99,043 | | | 99,043 | |
| Buildings and building improvements | 0 - 24 years | | 79,661 | | | 79,661 | |
| Construction in progress | N/A | | 289,515 | | | 287,701 | |
| Properties, cost | | | 1,663,588 | | | 1,659,495 | |
| Less: accumulated depreciation | | | (219,609) | | | (209,509) | |
| Properties, net | | | $ | 1,443,979 | | | $ | 1,449,986 | |
During the three months ended March 31, 2023, there were no material sales of property within the REIS Equity Portfolio. During the three months ended March 31, 2022, we sold an operating property within the REIS Equity Portfolio for $34.5 million and recognized a gain of $11.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.
During the three months ended March 31, 2023, there were no sales of property within the Commercial and Residential Lending Segment. During the three months ended March 31, 2022, we sold an operating property within the Commercial and Residential Lending Segment for $114.8 million and recognized a gain of $86.6 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. Refer to Note 3 for further discussion.
7. Investments of Consolidated Affordable Housing Fund
As discussed in Note 2, we established the Woodstar Fund effective November 5, 2021, an investment fund which holds our Woodstar multifamily affordable housing portfolios. The Woodstar portfolios consist of the following:
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 properties at fair value of $1.6 billion and debt at fair value of $728.6 million as of March 31, 2023.
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 properties at fair value of $1.3 billion and debt at fair value of $478.4 million as of March 31, 2023.
Income from the Woodstar Fund’s investments reflects the following components for the three months ended March 31, 2023 and 2022 (in thousands):
| | | | | | | | | | | | |
| Three Months Ended March 31, | |
| 2023 | | 2022 | |
Distributions from affordable housing fund investments | $ | 11,805 | | | $ | 10,190 | | |
Unrealized change in fair value of investments (1) | 1,160 | | | 223,851 | | |
Income from affordable housing fund investments | $ | 12,965 | | | $ | 234,041 | | |
______________________________________________________________________________________________________________________
(1)The fair value of the Woodstar Fund’s investments are dependent upon the real estate and capital markets, which are cyclical in nature. Property and investment values are affected by, among other things, capitalization rates, the availability of capital, occupancy, rental rates and interest and inflation rates.
8. Investments in Unconsolidated Entities
The table below summarizes our investments in unconsolidated entities as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| Participation /
Ownership % (1) | | Carrying value as of |
| | March 31, 2023 | | December 31, 2022 |
| Equity method investments: | | | | | |
Equity interest in two natural gas power plants | 10% - 12% | | $ | 48,359 | | | $ | 46,618 | |
| Investor entity which owns equity in an online real estate company | 50% | | 5,486 | | | 5,457 | |
| Equity interest in a residential mortgage originator (2) | N/A | | — | | | 1,449 | |
| Various | 25% - 50% | | 16,233 | | | 15,377 | |
| | | 70,078 | | | 68,901 | |
| Other equity investments: | | | | | |
| Equity interest in a servicing and advisory business | 2% | | 12,955 | | | 12,955 | |
| Investment funds which own equity in a loan servicer and other real estate assets | 4% - 6% | | 940 | | | 940 | |
| Investor entities which own equity interests in two entertainment and retail centers (3) | 15% | | 7,322 | | | 7,322 | |
| Various | 1% - 3% | | 1,774 | | | 1,774 | |
| | | 22,991 | | | 22,991 | |
| | | $ | 93,069 | | | $ | 91,892 | |
______________________________________________________________________________________________________________________
(1)None of these investments are publicly traded and therefore quoted market prices are not available.
(2)In January 2023, we sold our ownership interest to an unaffiliated third party.
(3)In March 2021, we obtained equity interests in two investor entities that own interests in two entertainment and retail centers in satisfaction of $7.3 million principal amount of a commercial loan. The interests were obtained in order to facilitate repayment of a portion of that loan for which these interests represented underlying collateral. The interests are entitled to preferred treatment in the distribution waterfall and are intended to repay us the $7.3 million principal amount of the loan plus interest. See further discussion in Note 4.
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 March 31, 2023.
During the three months ended March 31, 2023, we did not become aware of (i) any observable price changes in our other equity investments accounted for under the fair value practicability election or (ii) any indicators of impairment.
9. Goodwill and Intangibles
Goodwill
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.
Infrastructure Lending Segment
The Infrastructure Lending Segment’s goodwill of $119.4 million at both March 31, 2023 and December 31, 2022 represents the excess of consideration transferred over the fair value of net assets acquired on September 19, 2018 and October 15, 2018. The goodwill recognized is attributable to value embedded in the acquired Infrastructure Lending Segment’s lending platform.
LNR Property LLC (“LNR”)
The Investing and Servicing Segment’s goodwill of $140.4 million at both March 31, 2023 and December 31, 2022 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.
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 March 31, 2023 and December 31, 2022, the balance of the domestic servicing intangible was net of $38.7 million and $39.1 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 both March 31, 2023 and December 31, 2022, the domestic servicing intangible had a balance of $56.8 million, which represents our economic interest in this asset.
Lease Intangibles
In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and favorable lease intangible assets associated with certain non-cancelable operating leases of the acquired properties.
The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2023 | | As of December 31, 2022 |
| Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Value | | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Value |
| Domestic servicing rights, at fair value | $ | 18,094 | | | $ | — | | | $ | 18,094 | | | $ | 17,790 | | | $ | — | | | $ | 17,790 | |
| In-place lease intangible assets | 98,622 | | | (66,064) | | | 32,558 | | | 98,622 | | | (64,246) | | | 34,376 | |
| Favorable lease intangible assets | 26,649 | | | (10,505) | | | 16,144 | | | 26,649 | | | (10,042) | | | 16,607 | |
| Total net intangible assets | $ | 143,365 | | | $ | (76,569) | | | $ | 66,796 | | | $ | 143,061 | | | $ | (74,288) | | | $ | 68,773 | |
The following table summarizes the activity within intangible assets for the three months ended March 31, 2023 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Domestic
Servicing
Rights | | In-place Lease
Intangible
Assets | | Favorable Lease
Intangible
Assets | | Total |
| Balance as of January 1, 2023 | $ | 17,790 | | | $ | 34,376 | | | $ | 16,607 | | | $ | 68,773 | |
| | | | | | | |
| Amortization | — | | | (1,818) | | | (463) | | | (2,281) | |
| | | | | | | |
| | | | | | | |
| Changes in fair value due to changes in inputs and assumptions | 304 | | | — | | | — | | | 304 | |
| Balance as of March 31, 2023 | $ | 18,094 | | | $ | 32,558 | | | $ | 16,144 | | | $ | 66,796 | |
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):
| | | | | |
| 2023 (remainder of) | $ | 6,170 | |
| 2024 | 6,754 | |
| 2025 | 5,649 | |
| 2026 | 4,123 | |
| 2027 | 3,630 | |
| Thereafter | 22,376 | |
| Total | $ | 48,702 | |
10. Secured Borrowings
Secured Financing Agreements
The following table is a summary of our secured financing agreements in place as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Outstanding Balance at |
| Current
Maturity | | Extended Maturity (a) | | Weighted Average
Pricing | | Pledged Asset
Carrying Value | | Maximum
Facility Size | | March 31, 2023 | | December 31, 2022 |
| Repurchase Agreements: | | | | | | | | | | | | | |
| Commercial Loans | Jun 2023 to Jun 2027 | (b) | Oct 2025 to Dec 2030 | (b) | Index + 2.06% | (c) | $ | 11,206,590 | | | $ | 12,212,382 | | (d) | $ | 7,818,505 | | | $ | 7,746,867 | |
| Residential Loans | Oct 2023 to Apr 2024 | | N/A | | SOFR + 2.22% | | 2,204,038 | | | 3,064,671 | | | 1,967,984 | | | 1,912,774 | |
| Infrastructure Loans | Sep 2024 | | Sep 2026 | | SOFR + 2.07% | | 333,957 | | | 650,000 | | | 274,817 | | | 290,431 | |
| Conduit Loans | Dec 2023 to Jun 2025 | | Feb 2024 to Jun 2027 | | SOFR + 2.35% | | 66,572 | | | 375,000 | | | 57,960 | | | 8,423 | |
| CMBS/RMBS | Oct 2023 to Apr 2032 | (e) | Oct 2023 to Oct 2032 | (e) | (f) | | 1,488,626 | | | 1,083,841 | | | 824,912 | | (g) | 840,625 | |
| Total Repurchase Agreements | | | | | | | 15,299,783 | | | 17,385,894 | | | 10,944,178 | | | 10,799,120 | |
| Other Secured Financing: | | | | | | | | | | | | | |
| Borrowing Base Facility | Nov 2024 | | Oct 2026 | | SOFR + 2.11% | | 12,018 | | | 750,000 | | (h) | 9,234 | | | — | |
| Commercial Financing Facilities | Dec 2023 to Aug 2025 | | Jul 2025 to Dec 2030 | | Index + 1.98% | | 354,323 | | | 458,074 | | (i) | 256,247 | | | 311,825 | |
| Residential Financing Facility | Mar 2024 | | Mar 2027 | | SOFR + 2.45% | | 525,297 | | | 500,000 | | | 474,660 | | | 244,418 | |
| Infrastructure Financing Facilities | Jun 2025 to Oct 2025 | | Jun 2027 to Jul 2032 | | Index + 2.08% | | 1,020,629 | | | 1,550,000 | | | 776,024 | | | 765,265 | |
| Property Mortgages - Fixed rate | Nov 2024 to Sep 2029 | (j) | N/A | | 4.46% | | 364,090 | | | 260,891 | | | 260,891 | | | 261,100 | |
| Property Mortgages - Variable rate | Nov 2023 to Dec 2027 | | N/A | | (k) | | 1,001,298 | | | 850,387 | | | 847,625 | | | 847,633 | |
| Term Loans and Revolver | (l) | | N/A | | (l) | | N/A | (l) | 1,527,269 | | | 1,377,269 | | | 1,380,766 | |
| Total Other Secured Financing | | | | | | | 3,277,655 | | | 5,896,621 | | | 4,001,950 | | | 3,811,007 | |
| | | | | | | $ | 18,577,438 | | | $ | 23,282,515 | | | 14,946,128 | | | 14,610,127 | |
| Unamortized net discount | | | | | | | | | | (28,897) | | | (30,320) | |
| Unamortized deferred financing costs | | | | | | | | | | (70,243) | | | (78,275) | |
| | | | | | | | | | | $ | 14,846,988 | | | $ | 14,501,532 | |
______________________________________________________________________________________________________________________(a)Subject to certain conditions as defined in the respective facility agreement.
(b)For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.
(c)Certain facilities with an outstanding balance of $2.9 billion as of March 31, 2023 are indexed to EURIBOR, BBSY, SARON and SONIA. The remainder are indexed to USD LIBOR or SOFR.
(d)Certain facilities with an aggregate initial maximum facility size of $12.1 billion may be increased to $12.2 billion, subject to certain conditions. The $12.2 billion amount includes such upsizes.
(e)Certain facilities with an outstanding balance of $356.2 million as of March 31, 2023 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.
(f)A facility with an outstanding balance of $261.8 million as of March 31, 2023 has a weighted average fixed annual interest rate of 3.25%. All other facilities are variable rate with a weighted average rate of SOFR + 2.15%.
(g)Includes: (i) $261.8 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $42.2 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).
(h)The maximum facility size as of March 31, 2023 of $450.0 million may be increased to $750.0 million, subject to certain conditions.
(i)Certain facilities with an aggregate initial maximum facility size of $358.1 million may be increased to $458.1 million, subject to certain conditions. The $458.1 million amount includes such upsizes.
(j)The weighted average maturity is 4.2 years as of March 31, 2023.
(k)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 Index + 3.35%.
(l)Consists of: (i) a $778.8 million term loan facility that matures in July 2026, of which $386.0 million has an annual interest rate of LIBOR + 2.50% and $392.8 million has an annual interest rate of LIBOR + 3.25%, subject to a 0.75% LIBOR floor, (ii) a $150.0 million revolving credit facility that matures in April 2026 with an annual interest rate of SOFR + 2.50% and (iii) a $598.5 million term loan facility that matures in November 2027, with an annual interest rate of SOFR + 3.25%, subject to a 0.50% SOFR floor. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $5.4 billion as of March 31, 2023.
The above table no longer reflects property mortgages of the Woodstar Portfolios which, as discussed in Notes 2 and 7, are now reflected within “Investments of consolidated affordable housing fund” on our condensed consolidated balance sheets.
In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.
During the three months ended March 31, 2023, we amended a commercial credit facility resulting in an upsize of $200.0 million.
Our secured financing agreements contain certain financial tests and covenants. As of March 31, 2023, 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 69% of these agreements, do not permit valuation adjustments based on capital market events and are limited to collateral-specific credit marks generally determined on a commercially reasonable basis. 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 31% of repurchase agreements which do permit valuation adjustments based on capital market events, approximately 6% of these pertain to our loans held-for-sale, for which we manage credit risk through the purchase of credit 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 three months ended March 31, 2023 and 2022, approximately $10.2 million and $9.6 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.
As of March 31, 2023, Morgan Stanley Bank, N.A. and JPMorgan Chase Bank, N.A. held collateral sold under certain of our repurchase agreements with carrying values that exceeded the respective repurchase obligations by $814.5 million and $692.2 million, respectively. The weighted average extended maturity of those repurchase agreements is 3.2 years and 4.7 years, respectively.
Collateralized Loan Obligations and Single Asset Securitization
Commercial and Residential Lending Segment
In February 2022, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2022-FL3. On the closing date, the CLO issued $1.0 billion of notes and preferred shares, of which $842.5 million of notes were purchased by third party investors. We retained $82.5 million of notes along with preferred shares with a liquidation preference of $75.0 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 for a period of two years. During the three months ended March 31, 2023, we utilized the reinvestment feature, contributing $0.5 million of additional interests into the CLO.
In July 2021, we contributed into a single asset securitization, STWD 2021-HTS, a previously originated $230.0 million first mortgage and mezzanine loan on a portfolio of 41 extended stay hotels with $210.1 million of third party financing.
In May 2021, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2021-FL2. On the closing date, the CLO issued $1.3 billion of notes and preferred shares, of which $1.1 billion of notes were purchased by third party investors. We retained $70.1 million of notes, along with preferred shares with a liquidation preference of $127.5 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 three months ended March 31, 2023, we utilized the reinvestment feature, contributing $18.9 million of additional interests into the CLO.
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 of notes and preferred shares, of which $936.4 million of notes were 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, allowed us to contribute new loans or participation interests in loans to the CLO in exchange for cash. The reinvestment period expired during 2022 and during the three months ended March 31, 2023, we repaid CLO debt in the amount of $5.0 million.
Infrastructure Lending Segment
In January 2022, we refinanced a pool of our infrastructure loans held-for-investment through a CLO, STWD 2021-SIF2. On the closing date, the CLO issued $500.0 million of notes and preferred shares, of which $410.0 million of notes were purchased by third party investors. We retained preferred shares with a liquidation preference of $90.0 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 for a period of three years. During the three months ended March 31, 2023, we utilized the reinvestment feature, contributing $33.2 million of additional interests into the CLO.
In April 2021, we refinanced a pool of our infrastructure loans held-for-investment through a CLO, STWD 2021-SIF1. On the closing date, the CLO issued $500.0 million of notes and preferred shares, of which $410.0 million of notes were purchased by third party investors. We retained preferred shares with a liquidation preference of $90.0 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 for a period of three years. During the three months ended March 31, 2023, we utilized the reinvestment feature, contributing $53.4 million of additional interests into the CLO.
The following table is a summary of our CLOs and our SASB as of March 31, 2023 and December 31, 2022 (amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | Count | | Face
Amount | | Carrying
Value | | Weighted
Average Spread | | | Maturity | |
| STWD 2022-FL3 | | | | | | | | | | | |
| Collateral assets | 51 | | $ | 1,000,000 | | | $ | 1,010,710 | | | Index + 3.48% | (a) | | March 2026 | (b) |
| Financing | 1 | | 842,500 | | | 841,721 | | | SOFR + 1.93% | (c) | | November 2038 | (d) |
| STWD 2021-HTS | | | | | | | | | | | |
| Collateral assets | 1 | | 230,000 | | | 231,239 | | | LIBOR + 3.87% | (a) | | April 2026 | (b) |
| Financing | 1 | | 210,091 | | | 209,187 | | | LIBOR + 2.71% | (c) | | April 2034 | (d) |
| STWD 2021-FL2 | | | | | | | | | | | |
| Collateral assets | 38 | | 1,278,175 | | | 1,286,362 | | | Index + 3.90% | (a) | | August 2025 | (b) |
| Financing | 1 | | 1,077,375 | | | 1,073,081 | | | LIBOR + 1.80% | (c) | | April 2038 | (d) |
| STWD 2019-FL1 | | | | | | | | | | | |
| Collateral assets | 16 | | 897,821 | | | 902,795 | | | Index + 3.42% | (a) | | December 2024 | (b) |
| Financing | 1 | | 734,196 | | | 734,196 | | | SOFR + 1.64% | (c) | | July 2038 | (d) |
| STWD 2021-SIF2 | | | | | | | | | | | |
| Collateral assets | 31 | | 499,317 | | | 511,809 | | | Index + 3.81% | (a) | | June 2027 | (b) |
| Financing | 1 | | 410,000 | | | 407,487 | | | SOFR + 2.11% | (c) | | January 2033 | (d) |
| STWD 2021-SIF1 | | | | | | | | | | | |
| Collateral assets | 31 | | 498,843 | | | 512,634 | | | Index + 3.98% | (a) | | March 2027 | (b) |
| Financing | 1 | | 410,000 | | | 407,111 | | | LIBOR + 2.15% | (c) | | April 2032 | (d) |
| Total | | | | | | | | | | | |
| Collateral assets | | | $ | 4,404,156 | | | $ | 4,455,549 | | | | | | | |
| Financing | | | $ | 3,684,162 | | | $ | 3,672,783 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | Count | | Face
Amount | | Carrying
Value | | Weighted
Average Spread | | | Maturity | |
| STWD 2022-FL3 | | | | | | | | | | | |
| Collateral assets | 51 | | $ | 1,000,000 | | | $ | 1,010,051 | | | Index + 3.52% | (a) | | February 2026 | (b) |
| Financing | 1 | | 842,500 | | | 842,374 | | | SOFR + 1.93% | (c) | | November 2038 | (d) |
| STWD 2021-HTS | | | | | | | | | | | |
| Collateral assets | 1 | | 230,000 | | | 231,186 | | | LIBOR + 3.85% | (a) | | April 2026 | (b) |
| Financing | 1 | | 210,091 | | | 208,961 | | | LIBOR + 2.71% | (c) | | April 2034 | (d) |
| STWD 2021-FL2 | | | | | | | | | | | |
| Collateral assets | 36 | | 1,277,474 | | | 1,284,240 | | | Index + 4.04% | (a) | | June 2025 | (b) |
| Financing | 1 | | 1,077,375 | | | 1,072,403 | | | LIBOR + 1.80% | (c) | | April 2038 | (d) |
| STWD 2019-FL1 | | | | | | | | | | | |
| Collateral assets | 16 | | 902,799 | | | 906,409 | | | Index + 3.67% | (a) | | December 2024 | (b) |
| Financing | 1 | | 739,174 | | | 738,473 | | | SOFR + 1.64% | (c) | | July 2038 | (d) |
| STWD 2021-SIF2 | | | | | | | | | | | |
| Collateral assets | 31 | | 495,587 | | | 510,730 | | | Index + 3.73% | (a) | | February 2027 | (b) |
| Financing | 1 | | 410,000 | | | 407,260 | | | SOFR + 2.11% | (c) | | January 2033 | (d) |
| STWD 2021-SIF1 | | | | | | | | | | | |
| Collateral assets | 31 | | 495,781 | | | 511,471 | | | Index + 3.76% | (a) | | November 2026 | (b) |
| Financing | 1 | | 410,000 | | | 406,753 | | | LIBOR + 2.15% | (c) | | April 2032 | (d) |
| Total | | | | | | | | | | | |
| Collateral assets | | | $ | 4,401,641 | | | $ | 4,454,087 | | | | | | | |
| Financing | | | $ | 3,689,140 | | | $ | 3,676,224 | | | | | | | |
______________________________________________________________________________________________________________________________(a)Represents the weighted-average coupon earned on variable rate loans during the respective year-to-date period. Of the loans financed by the STWD 2021-FL2 CLO as of March 31, 2023, 7% earned fixed-rate weighted average interest of 7.44%. Of the investments financed by the STWD 2021-SIF1 CLO as of March 31, 2023, 2% earned fixed-rate weighted average interest of 5.69%.
(b)Represents the weighted-average maturity, assuming the extended contractual maturity of the collateral assets.
(c)Represents the weighted-average cost of financing incurred during the respective year-to-date period, inclusive of deferred issuance costs.
(d)Repayments of the CLOs and SASB are tied to timing of the related collateral asset repayments. The term of the CLOs and SASB financing obligations represents the legal final maturity date.
We incurred $37.9 million of issuance costs in connection with the CLOs and SASB, which are amortized on an effective yield basis over the estimated life of the CLOs and SASB. For the three months ended March 31, 2023 and 2022, approximately $2.7 million and $2.4 million, respectively, of amortization of deferred financing costs was included in interest expense on our condensed consolidated statements of operations. As of March 31, 2023 and December 31, 2022, our unamortized issuance costs were $15.5 million and $18.2 million, respectively.
The CLOs and SASB are considered VIEs, for which we are deemed the primary beneficiary. We therefore consolidate the CLOs and SASB. 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 | | CLOs and SASB (a) | | Total |
| 2023 (remainder of) | $ | 1,525,152 | | | $ | 116,078 | | | $ | 622,627 | | | $ | 2,263,857 | |
| 2024 | 2,067,428 | | | 669,794 | | | 382,949 | | | 3,120,171 | |
| 2025 | 1,214,463 | | | 285,997 | | | 828,283 | | | 2,328,743 | |
| 2026 | 2,439,183 | | | 932,082 | | | 1,582,383 | | | 4,953,648 | |
| 2027 | 3,436,146 | | | 1,794,367 | | | 115,264 | | | 5,345,777 | |
| Thereafter | 261,806 | | | 203,632 | | | 152,656 | | | 618,094 | |
| Total | $ | 10,944,178 | | | $ | 4,001,950 | | | $ | 3,684,162 | | | $ | 18,630,290 | |
______________________________________________________________________________________________________________________
(a)For the CLOs, the above does not assume utilization of their reinvestment features. The SASB does not have a reinvestment feature.
11. Unsecured Senior Notes
The following table is a summary of our unsecured senior notes outstanding as of March 31, 2023 and December 31, 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Coupon
Rate | | | Effective
Rate (1) | | Maturity
Date | | Remaining
Period of
Amortization | | Carrying Value at |
| | | | March 31, 2023 | | December 31, 2022 |
| 2023 Convertible Notes | 4.38 | % | | | 4.57 | % | | 4/1/2023 | | 0.0 years | | 250,000 | | | 250,000 | |
| 2023 Senior Notes | 5.50 | % | | | 5.71 | % | | 11/1/2023 | | 0.6 years | | 300,000 | | | 300,000 | |
| 2024 Senior Notes | 3.75 | % | | | 3.94 | % | | 12/31/2024 | | 1.8 years | | 400,000 | | | 400,000 | |
| 2025 Senior Notes | 4.75 | % | | (2) | 5.04 | % | | 3/15/2025 | | 2.0 years | | 500,000 | | | 500,000 | |
| 2026 Senior Notes | 3.63 | % | | | 3.77 | % | | 7/15/2026 | | 3.3 years | | 400,000 | | | 400,000 | |
| 2027 Senior Notes | 4.38 | % | | (3) | 4.49 | % | | 1/15/2027 | | 3.8 years | | 500,000 | | | 500,000 | |
| Total principal amount | | | | | | | | | | 2,350,000 | | | 2,350,000 | |
| Unamortized discount—Convertible Notes | | | | | | | | | — | | | (118) | |
| Unamortized discount—Senior Notes | | | | | | | | | (8,137) | | | (9,051) | |
| Unamortized deferred financing costs | | | | | | | | | (10,418) | | | (11,620) | |
| Total carrying amount | | | | | | | | | $ | 2,331,445 | | | $ | 2,329,211 | |
______________________________________________________________________________________________________________________
(1)Effective rate includes the effects of underwriter purchase discount.
(2)The coupon on the 2025 Senior Notes is 4.75%. At closing, we swapped $470.0 million of the notes to a floating rate of LIBOR + 2.53%.
(3)The coupon on the 2027 Senior Notes is 4.375%. At closing, we swapped the notes to a floating rate of SOFR + 2.95%.
Our unsecured senior notes contain certain financial tests and covenants. As of March 31, 2023, we were in compliance with all such covenants.
Convertible Senior Notes
On March 29, 2017, we issued $250.0 million of 4.375% Convertible Senior Notes due 2023 (the “Convertible Notes”) which were outstanding at March 31, 2023. The entire $250.0 million principal balance of the Convertible Notes matured and was repaid in cash on April 1, 2023.
For both the three months ended March 31, 2023 and 2022, we recognized interest expense of $2.9 million from our Convertible Notes.
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.
The following summarizes the face amount and proceeds of commercial and residential loans securitized for the three months ended March 31, 2023 and 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Loans | | Residential Loans |
| Face Amount | | Proceeds | | Face Amount | | Proceeds |
| For the Three Months Ended March 31, | | | | | | | |
| 2023 | $ | 12,196 | | | $ | 13,439 | | | $ | — | | | $ | — | |
| 2022 | 347,442 | | | 342,067 | | | 1,077,958 | | | 1,100,284 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
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 |
| | | Residential Loans |
| For the Three Months Ended March 31, | | | | | Face Amount | | Proceeds |
| 2023 | | | | | $ | — | | | $ | — | |
| 2022 | | | | | 835,760 | | | 836,116 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
There were no sales of commercial loans within the Commercial and Residential Lending Segment during the three months ended March 31, 2023 and 2022.
Infrastructure Loan Sales
There were no sales of loans by the Infrastructure Lending Segment during the three months ended March 31, 2023 and 2022.
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. Refer to Note 14 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.
Designated Hedges
The Company does not generally elect to apply the hedge accounting designation to its hedging instruments. As of March 31, 2023 and December 31, 2022, the Company did not have any designated hedges.
Non-designated Hedges and Derivatives
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;
•Interest rate contracts which hedge a portion of our exposure to changes in interest rates;
•Credit instruments which hedge a portion of our exposure to the credit risk of our commercial loans held-for-sale; and
•Interest rate swap guarantees whereby we guarantee the interest rate swap obligations of certain Infrastructure Lending borrowers. Our interest rate swap guarantees were assumed in connection with the acquisition of the Infrastructure Lending Segment.
The following table summarizes our non-designated derivatives as of March 31, 2023 (notional amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Type of Derivative | | Number of Contracts | | Aggregate Notional Amount | | Notional Currency | | Maturity |
| Fx contracts – Buy Euros (“EUR”) | | 5 | | 7,549 | | | EUR | | May 2023 - April 2026 |
| Fx contracts – Buy Pounds Sterling (“GBP”) | | 6 | | 17,733 | | | GBP | | October 2023 - October 2024 |
| Fx contracts – Buy Australian dollar (“AUD”) | | 2 | | 25,095 | | | AUD | | August 2023 - January 2025 |
| | | | | | | | |
| Fx contracts – Sell EUR | | 209 | | 725,395 | | | EUR | | April 2023 - October 2026 |
| Fx contracts – Sell GBP | | 174 | | 573,883 | | | GBP | | April 2023 - April 2027 |
| Fx contracts – Sell AUD | | 94 | | 654,011 | | | AUD | | April 2023 - January 2026 |
| Fx contracts – Sell Swiss Franc (“CHF”) | | 78 | | 21,138 | | | CHF | | May 2023 - November 2025 |
| Interest rate swaps – Paying fixed rates | | 52 | | 4,344,250 | | | USD | | April 2024 - March 2033 |
| Interest rate swaps – Receiving fixed rates | | 2 | | 970,000 | | | USD | | March 2025 - January 2027 |
| Interest rate caps | | 4 | | 625,000 | | | USD | | November 2023 - April 2025 |
| Interest rate caps | | 1 | | 61,000 | | | GBP | | April 2024 |
| Credit instruments | | 3 | | 49,000 | | | USD | | September 2058 - August 2061 |
| Interest rate swap guarantees | | 2 | | 147,019 | | | USD | | June 2023 - June 2025 |
| Total | | 632 | | | | | | |
The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value of Derivatives
in an Asset Position (1) as of | | Fair Value of Derivatives
in a Liability Position (2) as of |
| March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
| Interest rate contracts | $ | 10,849 | | | $ | 10,756 | | | $ | 56,978 | | | $ | 69,776 | |
| | | | | | | |
| Foreign exchange contracts | 84,652 | | | 97,289 | | | 21,429 | | | 21,628 | |
| Credit instruments | 1,118 | | | 576 | | | — | | | — | |
| Total derivatives | $ | 96,619 | | | $ | 108,621 | | | $ | 78,407 | | | $ | 91,404 | |
___________________________________________________
(1)Classified as derivative assets in our condensed consolidated balance sheets.
(2)Classified as derivative liabilities in our condensed consolidated balance sheets.
The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives Not Designated
as Hedging Instruments | | Location of (Loss) Gain
Recognized in Income | | Amount of (Loss) Gain Recognized in Income for the Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Interest rate contracts | | (Loss) gain on derivative financial instruments | | $ | (22,950) | | | $ | 102,933 | | | | | |
| Interest rate swap guarantees | | (Loss) gain on derivative financial instruments | | — | | | 159 | | | | | |
| Foreign exchange contracts | | (Loss) gain on derivative financial instruments | | (10,344) | | | 24,142 | | | | | |
| Credit instruments | | (Loss) gain on derivative financial instruments | | 466 | | | 34 | | | | | |
| | | | $ | (32,828) | | | $ | 127,268 | | | | | |
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (ii)
Gross Amounts
Offset in the
Statement of
Financial Position | | (iii) = (i) - (ii)
Net Amounts
Presented in
the Statement of
Financial Position | | (iv)
Gross Amounts Not
Offset in the Statement
of Financial Position | | |
| (i)
Gross Amounts
Recognized | | | | Financial
Instruments | | Cash Collateral
Received / Pledged | | (v) = (iii) - (iv)
Net Amount |
| As of March 31, 2023 | | | | | | | | | | | |
| Derivative assets | $ | 96,619 | | | $ | — | | | $ | 96,619 | | | $ | 63,650 | | | $ | — | | | $ | 32,969 | |
| Derivative liabilities | $ | 78,407 | | | $ | — | | | $ | 78,407 | | | $ | 63,650 | | | $ | 14,757 | | | $ | — | |
| Repurchase agreements | 10,944,178 | | | — | | | 10,944,178 | | | 10,944,178 | | | — | | | — | |
| $ | 11,022,585 | | | $ | — | | | $ | 11,022,585 | | | $ | 11,007,828 | | | $ | 14,757 | | | $ | — | |
| As of December 31, 2022 | | | | | | | | | | | |
| Derivative assets | $ | 108,621 | | | $ | — | | | $ | 108,621 | | | $ | 69,221 | | | $ | — | | | $ | 39,400 | |
| Derivative liabilities | $ | 91,404 | | | $ | — | | | $ | 91,404 | | | $ | 69,221 | | | $ | 22,183 | | | $ | — | |
| Repurchase agreements | 10,799,120 | | | — | | | 10,799,120 | | | 10,799,120 | | | — | | | — | |
| $ | 10,890,524 | | | $ | — | | | $ | 10,890,524 | | | $ | 10,868,341 | | | $ | 22,183 | | | $ | — | |
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.
As discussed in Note 10, we have refinanced various pools of our commercial and infrastructure loans held-for-investment through five CLOs and one SASB, which are considered to be VIEs. We are the primary beneficiary of, and therefore consolidate, the CLOs and SASB in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager, collateral advisor, or controlling class representative that most significantly impact the CLOs’ and SASB's economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the CLOs and SASB that could be potentially significant through the subordinate interests we own.
The following table details the assets and liabilities of our consolidated CLOs and SASB as of March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Assets: | | | |
| Cash and cash equivalents | $ | 30,673 | | | $ | 31,611 | |
| Loans held-for-investment | 4,389,899 | | | 4,365,791 | |
| Investment securities | 11,747 | | | 36,466 | |
| Accrued interest receivable | 23,132 | | | 20,088 | |
| Other assets | 98 | | | 131 | |
| Total Assets | $ | 4,455,549 | | | $ | 4,454,087 | |
| Liabilities | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 19,256 | | | $ | 17,737 | |
| Collateralized loan obligations and single asset securitization, net | 3,672,783 | | | 3,676,224 | |
| Total Liabilities | $ | 3,692,039 | | | $ | 3,693,961 | |
Assets held by the CLOs and SASB are restricted and can be used only to settle obligations of the CLOs and SASB, including the subordinate interests owned by us. The liabilities of the CLOs and SASB are non-recourse to us and can only be satisfied from the assets of the CLOs and SASB.
We also hold controlling interests in other non-securitization entities that are considered VIEs. The Woodstar Fund, Woodstar Feeder Fund, L.P. and one of the Woodstar Fund’s indirect investees, SPT Dolphin Intermediate LLC (“SPT Dolphin”), the entity which holds the Woodstar II Portfolio, are each VIEs 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 those VIEs because we possess both the power to direct the activities of the VIEs that most significantly impact their economic performance and a significant economic interest in each entity. The Woodstar Fund had total assets of $1.8 billion, including its indirect
investment in SPT Dolphin, and no significant liabilities as of March 31, 2023. As of March 31, 2023, Woodstar Feeder Fund, L.P. and its consolidated subsidiary which is also considered a VIE, Woodstar Feeder REIT, LLC, had a $0.5 billion investment in the Woodstar Fund, had no significant liabilities and had temporary equity of $0.4 billion consisting of the contingently redeemable non-controlling interests of the third party investors (see Note 17).
We also hold a 51% controlling interest in a 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 are deemed the primary beneficiary of the CMBS JV. This VIE had total assets of $360.3 million and liabilities of $87.4 million as of March 31, 2023. Refer to Note 17 for further discussion.
In addition to the above non-securitization entities, we have smaller VIEs with total assets of $75.4 million and liabilities of $35.3 million as of March 31, 2023.
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 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 March 31, 2023, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $18.9 million on a fair value basis.
As of March 31, 2023, 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 $4.6 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 $0.9 million as of March 31, 2023, within investments 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. Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.
Base Management Fee. For the three months ended March 31, 2023 and 2022, approximately $21.8 million and $21.5 million, respectively, was incurred for base management fees. As of March 31, 2023 and December 31, 2022, there were $21.8 million and $21.8 million, respectively, of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.
Incentive Fee. For the three months ended March 31, 2023 and 2022, approximately $12.4 million and $29.0 million, respectively, was incurred for incentive fees. As of March 31, 2023 and December 31, 2022, there were $12.4 million and $14.5 million of unpaid incentive fees included in related-party payable in our condensed consolidated balance sheets.
Expense Reimbursement. For both the three months ended March 31, 2023 and 2022, approximately $1.7 million was incurred for executive compensation and other reimbursable expenses and recognized within general and administrative expenses in our condensed consolidated statements of operations. As of March 31, 2023 and December 31, 2022, there were $5.4 million and $4.9 million, respectively, of unpaid reimbursable executive compensation and other expenses included in related-party payable in our condensed consolidated balance sheets.
Equity Awards. In certain instances, we issue RSAs to certain employees of affiliates of our Manager who perform services for us. During the three months ended March 31, 2023 and 2022, we granted 226,955 and 200,972 RSAs, respectively, at a grant date fair values of $4.3 million and $4.8 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $2.2 million and $2.7 million during the three months ended March 31, 2023 and 2022, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. These shares generally vest over a three-year period. Compensation expense related to the ESPP (refer to Note 17) for employees of affiliates of our Manager were not material during the three months ended March 31, 2023, and are reflected in general and administrative expenses in our condensed consolidated statement of operations.
Manager Equity Plan
In April 2022, the Company’s shareholders approved the Starwood Property Trust, Inc. 2022 Manager Equity Plan (the “2022 Manager Equity Plan”) which replaces the Starwood Property Trust, Inc. 2017 Manager Equity Plan (the “2017 Manager Equity Plan”). In November 2022, we granted 1,500,000 RSUs to our Manager under the 2022 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 connection with these grants and prior similar grants, we recognized share-based compensation expense of $5.1 million and $4.5 million within management fees in our condensed consolidated statements of operations for the three months ended March 31, 2023 and 2022, respectively. Refer to Note 17 for further discussion.
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 serve as our new Miami Beach office following the expiration of our former lease in Miami Beach. The lease, as amended in September 2022, is for 64,424 square feet of office space, commenced July 1, 2022 and has an initial term of 15 years from the monthly lease payment commencement date of November 1, 2022. 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. 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 and subsequent amendment were approved by our independent directors. In April 2020, we provided a $1.9 million cash security deposit to the landlord. During the three months ended March 31, 2023, we made payments to the landlord under the terms of the lease of $0.3 million for reimbursements relating to tenant improvements and $1.4 million for rent, parking and our pro rata share of building operating expenses. During the three months ended March 31, 2023, we recognized $1.6 million of expenses with respect to this lease within general and administrative expenses in our condensed consolidated statement of operations.
Other Related-Party Arrangements
Highmark Residential (“Highmark”), an affiliate of our Manager, provides property management services for properties within our Woodstar I and Woodstar II Portfolios. Fees paid to Highmark are calculated as a percentage of gross receipts and are at market terms. During the three months ended March 31, 2023 and 2022, property management fees to Highmark of $1.5 million and $1.4 million, respectively, were recognized within our Woodstar Portfolios.
Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.
17. Stockholders’ Equity and Non-Controlling Interests
During the three months ended March 31, 2023, our board of directors declared the following dividends:
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| Declaration Date | | Record Date | | Ex-Dividend Date | | Payment Date | | Amount | | Frequency |
| 3/16/23 | | 3/31/23 | | 3/30/23 | | 4/14/23 | | $ | 0.48 | | | Quarterly |
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ATM Agreement
In May 2022, we entered into a Starwood Property Trust, Inc. Common Stock Sales Agreement (the “ATM Agreement”) with a syndicate of financial institutions 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 New York Stock Exchange or otherwise at market prices prevailing at the time of sale or at negotiated prices. The ATM Agreement replaces a similar agreement previously entered into in May 2014 with a financial institution. There were no shares issued under the current or previous ATM Agreement during the three months ended March 31, 2023 and 2022.
Dividend Reinvestment and Direct Stock Purchase Plan
During the three months ended March 31, 2023 and 2022, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.
Employee Stock Purchase Plan
In April 2022, the Company’s shareholders approved the ESPP which allows eligible employees to purchase common stock of the Company at a discounted purchase price. The discounted purchase price of a share of the Company's common stock is 85% of the fair market value (closing market price) at the lower of the beginning or the end of the quarterly offering period. Participants may purchase shares not exceeding an aggregate fair market value of $25,000 in any calendar year. The maximum aggregate number of shares subject to issuance in accordance with the ESPP is 2,000,000 shares.
During the three months ended March 31, 2023, 65,026 shares of common stock were purchased by participants at a weighted average discounted purchase price of $14.91 per share. The Company recognized $0.2 million of compensation expense related to its ESPP during such period based on the estimated fair value of the discounted purchase options granted to the participants as of the beginning of the quarterly offering period determined using the Black-Scholes option pricing model.
As of March 31, 2023, there were 1.9 million shares of common stock available for future issuance through the ESPP.
Equity Incentive Plans
In April 2022, the Company’s shareholders approved the 2022 Manager Equity Plan and the Starwood Property Trust, Inc. 2022 Equity Plan (the “2022 Equity Plan”), which allow for the issuance of up to 18,700,000 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 2022 Manager Equity Plan succeeds and replaces the 2017 Manager Equity Plan and the 2022 Equity Plan succeeds and replaces the Starwood Property Trust, Inc. 2017 Equity Plan (the “2017 Equity Plan”).
The table below summarizes our share awards granted or vested under the 2017 and 2022 Manager Equity Plans during the three months ended March 31, 2023 and 2022 (dollar amounts in thousands):
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| Grant Date | | Type | | Amount Granted | | Grant Date Fair Value | | Vesting Period |
| | | | | | | | |
| November 2022 | | RSU | | 1,500,000 | | | $ | 31,605 | | | 3 years |
| November 2020 | | RSU | | 1,800,000 | | | $ | 30,078 | | | 3 years |
| September 2019 | | RSU | | 1,200,000 | | | 29,484 | | | (1) |
| | | | | | | | |
______________________________________________________________________________________________________________________
(1)Of the amount granted, 218,898 vested immediately on the grant date and the remaining amount vests over a three-year period.
Schedule of Non-Vested Shares and Share Equivalents (1)
| | | | | | | | | | | | | | | | | | | | | | | |
|
Equity Plan | |
Manager
Equity Plan | | Total | | Weighted Average
Grant Date Fair
Value (per share) |
| Balance as of January 1, 2022 | 2,513,847 | | | 1,825,000 | | | 4,338,847 | | | $ | 20.65 | |
| Granted | 863,888 | | | — | | | 863,888 | | | 18.91 | |
| Vested | (646,421) | | | (275,000) | | | (921,421) | | | 18.14 | |
| Forfeited | (18,509) | | | — | | | (18,509) | | | 24.67 | |
| Balance as of March 31, 2023 | 2,712,805 | | | 1,550,000 | | | 4,262,805 | | | 20.82 | |
(1) Equity-based award activity for awards granted under the 2017 and 2022 Equity Plans is reflected within the Equity Plan column, and for awards granted under the 2017 and 2022 Manager Equity Plans, within the Manager Equity Plan column.
As of March 31, 2023, there were 16.4 million shares of common stock available for future grants under the 2022 Manager Equity Plan and the 2022 Equity Plan.
Non-Controlling Interests in Consolidated Subsidiaries
As discussed in Note 2, on November 5, 2021 we sold a 20.6% non-controlling interest in the Woodstar Fund to third party investors for net cash proceeds of $214.2 million. Under the Woodstar Fund operating agreement, such interests are contingently redeemable by us, at the option of the interest holder, for cash at liquidation fair value if any assets remain upon termination of the Woodstar Fund. The Woodstar Fund operating agreement specifies an eight-year term with two one-year extension options, the first at our option and the second subject to consent of an advisory committee representing the non-controlling interest holders. Accordingly, these contingently redeemable non-controlling interests have been classified as “Temporary Equity” in our condensed consolidated balance sheets and represent the fair value of the Woodstar Fund’s net assets allocable to those interests. During the three months ended March 31, 2023 and 2022, net income attributable to these non-controlling interests was $2.3 million and $47.7 million, respectively.
In connection with our Woodstar II Portfolio acquisitions, we issued 10.2 million Class A Units in our subsidiary, SPT Dolphin, and rights to receive an additional 1.9 million Class A Units if certain contingent events occur. As of March 31, 2023, all of the 1.9 million contingent Class A Units were issued. The Class A Units are redeemable for consideration equal to the current share price of the Company’s common stock on a one-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the determination of the Company. There were 9.8 million Class A Units outstanding as of March 31, 2023. The outstanding Class A Units are reflected as non-controlling interests in consolidated subsidiaries on our consolidated balance sheets, the balance of which was $208.5 million as of March 31, 2023 and December 31, 2022.
To the extent SPT Dolphin has sufficient cash available, the Class A Units earn a preferred return indexed to the dividend rate of the Company’s common stock. Any distributions made pursuant to this waterfall are recognized within net income attributable to non-controlling interests in our condensed consolidated statements of operations. During both the three months ended March 31, 2023 and 2022, we recognized net income attributable to non-controlling interests of $4.7 million associated with these Class A Units.
As discussed in Note 15, we hold a 51% controlling interest in the CMBS JV within our Investing and Servicing Segment. Because the CMBS JV is deemed a VIE for which we are the primary beneficiary, the 49% interest of our joint venture partner is reflected as a non-controlling interest in consolidated subsidiaries on our condensed 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 condensed consolidated statement of operations. The non-controlling interests in the CMBS JV were $143.0 million and $144.3 million as of March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2023 and 2022, net income attributable to these non-controlling interests was $0.7 million and $3.6 million, respectively.
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):
| | | | | | | | | | | | | | | |
| For the Three Months Ended
March 31, | | |
| 2023 | | 2022 | | | | |
| Basic Earnings | | | | | | | |
| Income attributable to STWD common stockholders | $ | 51,974 | | | $ | 324,599 | | | | | |
| Less: Income attributable to participating shares not already deducted as non-controlling interests | (1,811) | | | (8,869) | | | | | |
| Basic earnings | $ | 50,163 | | | $ | 315,730 | | | | | |
| | | | | | | |
| Diluted Earnings | | | | | | | |
| Income attributable to STWD common stockholders | $ | 51,974 | | | $ | 324,599 | | | | | |
| Less: Income attributable to participating shares not already deducted as non-controlling interests | (1,811) | | | (8,869) | | | | | |
| Add: Interest expense on Convertible Notes | — | | | 2,904 | | | | | |
| Add: Undistributed earnings to participating shares | — | | | 7,342 | | | | | |
| Less: Undistributed earnings reallocated to participating shares | — | | | (7,109) | | | | | |
| Diluted earnings | $ | 50,163 | | | $ | 318,867 | | | | | |
| | | | | | | |
| Number of Shares: | | | | | | | |
| Basic — Average shares outstanding | 308,408 | | | 302,944 | | | | | |
| Effect of dilutive securities — Convertible Notes | — | | | 9,649 | | | | | |
| Effect of dilutive securities — Contingently issuable shares | 357 | | | 605 | | | | | |
| Effect of dilutive securities — Unvested non-participating shares | 231 | | | 131 | | | | | |
| Diluted — Average shares outstanding | 308,996 | | | 313,329 | | | | | |
| | | | | | | |
| Earnings Per Share Attributable to STWD Common Stockholders: | | | | | | | |
| Basic | $ | 0.16 | | | $ | 1.04 | | | | | |
| Diluted | $ | 0.16 | | | $ | 1.02 | | | | | |
As of March 31, 2023 and 2022, participating shares of 13.5 million and 13.0 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 both March 31, 2023 and 2022 included 9.8 million potential shares of our common stock issuable upon redemption of the Class A Units in SPT Dolphin, as discussed in Note 17.
19. Accumulated Other Comprehensive Income
The changes in AOCI by component are as follows (amounts in thousands):
| | | | | | | | | |
| Cumulative
Unrealized Gain
(Loss) on
Available-for-
Sale Securities | | | | |
| Three Months Ended March 31, 2023 | | | | | |
| Balance at January 1, 2023 | $ | 20,955 | | | | | |
| OCI before reclassifications | (1,104) | | | | | |
| Amounts reclassified from AOCI | — | | | | | |
| Net period OCI | (1,104) | | | | | |
| Balance at March 31, 2023 | $ | 19,851 | | | | | |
| Three Months Ended March 31, 2022 | | | | | |
| Balance at January 1, 2022 | $ | 40,953 | | | | | |
| OCI before reclassifications | (5,284) | | | | | |
| Amounts reclassified from AOCI | — | | | | | |
| Net period OCI | (5,284) | | | | | |
| Balance at March 31, 2022 | $ | 35,669 | | | | | |
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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 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, residential
We measure the fair value of our residential loans held-for-sale 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.
Woodstar Fund Investments
The fair value of investments held by the Woodstar Fund is determined based on observable and unobservable market inputs. The initial fair value of the Woodstar Fund's investments at its November 5, 2021 establishment date was determined by reference to the purchase price paid by third party investors, which was consistent with both a recent external appraisal as well as our extensive marketing efforts to sell interests in the Woodstar Fund, plus working capital. The fair value of the Woodstar Fund's investments as of December 31, 2022 was determined by reference to an external appraisal as of that date.
For the properties, the third party appraisals applied the income capitalization approach with corroborative support from the sales comparison approach. The cost approach was not employed, as it is typically not emphasized by potential investors in the multifamily affordable housing sector. The income capitalization approach estimates an income stream for a property over a 10-year period and discounts this income plus a reversion (presumed sale) into a present value at a risk adjusted discount rate. Terminal capitalization rates and discount rates utilized in this approach are derived from market transactions as well as other financial and industry data.
For secured financing, the third party appraisal discounted the contractual cash flows at the interest rate at which such arrangements would bear if executed in the current market. The fair value of investment level working capital is assumed to approximate carrying value due to its primarily short-term monetary nature. The fair value of interest rate derivatives is determined using the methodology described in the Derivatives discussion below.
Internal valuations at interim quarter ends, including March 31, 2023, are prepared by management. The valuation of properties is based on a direct income capitalization approach, whereby a direct capitalization market rate is applied to annualized in-place net operating income at the portfolio level. The direct capitalization rate is initially calibrated to the
implied rate from the latest appraisal and adjusted for subsequent changes in current market capitalization rates for sales of comparable multifamily properties. The valuations of secured financing agreements, working capital and interest rate derivatives are consistent with the methodologies described in the paragraph above.
Given the significance of the unobservable inputs used in the respective valuations, the Woodstar Fund’s investments have been classified within Level III of the fair value hierarchy.
Domestic servicing rights
The fair value of this intangible is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this intangible in its entirety should be classified in Level III of the fair value hierarchy.
Derivatives
The valuation of derivative contracts are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted 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 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 March 31, 2023 and December 31, 2022, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level II of the fair value hierarchy.
Liabilities of consolidated VIEs
Our consolidated VIE liabilities generally represent bonds that are not owned by us. The majority of these are either traded in the marketplace or can be analogized to similar securities that are traded in the marketplace. For these liabilities, pricing is considered to be Level II, where the valuation is based upon quoted prices for similar instruments traded in active markets. We generally utilize third party pricing service providers for valuing these liabilities. In order to determine whether to utilize the valuations provided by third parties, we conduct an ongoing evaluation of their valuation methodologies and processes, as well as a review of the individual valuations themselves. In evaluating third party pricing for reasonableness, we consider a variety of factors, including market transaction information for the particular bond, market transaction information for bonds within the same trust, market transaction information for similar bonds, the bond’s ratings and the bond’s subordination levels.
For the minority portion of our consolidated VIE liabilities which consist of unrated or non-investment grade bonds that are not owned by us, pricing may be either Level II or Level III. If independent third party pricing similar to that noted above is available, we consider the valuation to be Level II. If such third party pricing is not available, the valuation is generated from model-based techniques that use significant unobservable assumptions, and we consider the valuation to be Level III. For VIE liabilities classified as Level III, valuation is determined based on discounted expected future cash flows which take into consideration expected duration and yields based on market transaction information, ratings, subordination levels, vintage and current market spread. VIE liabilities may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the VIE liabilities become or cease to be observable.
Assets of consolidated VIEs
The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets of the VIE, we maximize the use of observable inputs over unobservable inputs. The individual assets of a VIE are inherently incapable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Because our methodology for valuing these assets does not value the individual assets of a VIE, but rather uses the value of the VIE 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 Only Disclosed
We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:
Loans held-for-investment
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, CLOs and SASB
The fair value of the secured financing agreements, CLOs and SASB 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.
Unsecured senior notes
The fair value of our unsecured senior notes is determined based on the last available bid price for the respective notes in the current market. As these prices represent observable market data, we have determined that the fair value of these instruments would be classified in Level II 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 March 31, 2023 and December 31, 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Total | | Level I | | Level II | | Level III |
| Financial Assets: | | | | | | | |
| Loans under fair value option | $ | 2,810,889 | | | $ | — | | | $ | — | | | $ | 2,810,889 | |
| RMBS | 111,069 | | | — | | | — | | | 111,069 | |
| CMBS | 18,945 | | | — | | | — | | | 18,945 | |
| Equity security | 10,134 | | | 10,134 | | | — | | | — | |
| Woodstar Fund investments | 1,762,162 | | | — | | | — | | | 1,762,162 | |
| Domestic servicing rights | 18,094 | | | — | | | — | | | 18,094 | |
| Derivative assets | 96,619 | | | — | | | 96,619 | | | — | |
| VIE assets | 50,526,390 | | | — | | | — | | | 50,526,390 | |
| Total | $ | 55,354,302 | | | $ | 10,134 | | | $ | 96,619 | | | $ | 55,247,549 | |
| Financial Liabilities: | | | | | | | |
| Derivative liabilities | $ | 78,407 | | | $ | — | | | $ | 78,407 | | | $ | — | |
| VIE liabilities | 48,838,686 | | | — | | | 44,005,146 | | | 4,833,540 | |
| Total | $ | 48,917,093 | | | $ | — | | | $ | 44,083,553 | | | $ | 4,833,540 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Total | | Level I | | Level II | | Level III |
| Financial Assets: | | | | | | | |
| Loans under fair value option | $ | 2,784,594 | | | $ | — | | | $ | — | | | $ | 2,784,594 | |
| RMBS | 113,386 | | | — | | | — | | | 113,386 | |
| CMBS | 19,108 | | | — | | | — | | | 19,108 | |
| Equity security | 9,840 | | | 9,840 | | | — | | | — | |
| Woodstar Fund investments | 1,761,002 | | | — | | | — | | | 1,761,002 | |
| Domestic servicing rights | 17,790 | | | — | | | — | | | 17,790 | |
| Derivative assets | 108,621 | | | — | | | 108,621 | | | — | |
| VIE assets | 52,453,041 | | | — | | | — | | | 52,453,041 | |
| Total | $ | 57,267,382 | | | $ | 9,840 | | | $ | 108,621 | | | $ | 57,148,921 | |
| Financial Liabilities: | | | | | | | |
| Derivative liabilities | $ | 91,404 | | | $ | — | | | $ | 91,404 | | | $ | — | |
| VIE liabilities | 50,754,355 | | | — | | | 45,248,412 | | | 5,505,943 | |
| Total | $ | 50,845,759 | | | $ | — | | | $ | 45,339,816 | | | $ | 5,505,943 | |
The changes in financial assets and liabilities classified as Level III are as follows for the three months ended March 31, 2023 and 2022 (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2023 | | Loans at
Fair Value | | RMBS | | CMBS | | Woodstar
Fund Investments | | Domestic
Servicing
Rights | | VIE Assets | | VIE
Liabilities | | Total |
January 1, 2023 balance | | $ | 2,784,594 | | | $ | 113,386 | | | $ | 19,108 | | | $ | 1,761,002 | | | $ | 17,790 | | | $ | 52,453,041 | | | $ | (5,505,943) | | | $ | 51,642,978 | |
| Total realized and unrealized gains (losses): | | | | | | | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | | | | | | | |
| Change in fair value / gain on sale | | 8,901 | | | — | | | (19) | | | 1,160 | | | 304 | | | (1,926,651) | | | 153,053 | | | (1,763,252) | |
| Net accretion | | — | | | 1,222 | | | — | | | — | | | — | | | — | | | — | | | 1,222 | |
| Included in OCI | | — | | | (1,104) | | | — | | | — | | | — | | | — | | | — | | | (1,104) | |
| Purchases / Originations | | 69,200 | | | — | | | — | | | — | | | — | | | — | | | — | | | 69,200 | |
| Sales | | (13,439) | | | — | | | — | | | — | | | — | | | — | | | — | | | (13,439) | |
| | | | | | | | | | | | | | | | |
| Cash repayments / receipts | | (38,367) | | | (2,435) | | | (144) | | | — | | | — | | | — | | | (1,109) | | | (42,055) | |
| | | | | | | | | | | | | | | | |
| Transfers out of Level III | | — | | | — | | | — | | | — | | | — | | | — | | | 520,459 | | | 520,459 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
March 31, 2023 balance | | $ | 2,810,889 | | | $ | 111,069 | | | $ | 18,945 | | | $ | 1,762,162 | | | $ | 18,094 | | | $ | 50,526,390 | | | $ | (4,833,540) | | | $ | 50,414,009 | |
Amount of unrealized gains (losses) attributable to assets still held at March 31, 2023: | | | | | | | | | | | | | | | | |
| Included in earnings | | $ | 6,205 | | | $ | 1,222 | | | $ | (19) | | | $ | 1,160 | | | $ | 304 | | | $ | (1,926,651) | | | $ | 153,053 | | | $ | (1,764,726) | |
| Included in OCI | | $ | — | | | $ | (1,104) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (1,104) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 | | Loans at
Fair Value | | RMBS | | CMBS | | Woodstar Fund Investments | | Domestic
Servicing
Rights | | VIE Assets | | VIE
Liabilities | | Total |
January 1, 2022 balance | | $ | 2,936,025 | | | $ | 143,980 | | | $ | 22,244 | | | $ | 1,040,309 | | | $ | 16,780 | | | $ | 61,280,543 | | | $ | (4,780,221) | | | $ | 60,659,660 | |
| Total realized and unrealized gains (losses): | | | | | | | | | | | | | | | | |
| Included in earnings: | | | | | | | | | | | | | | | | |
| Change in fair value / gain on sale | | (125,783) | | | — | | | (692) | | | 223,851 | | | 1,084 | | | (3,896,602) | | | 474,911 | | | (3,323,231) | |
| Net accretion | | — | | | 2,605 | | | — | | | — | | | — | | | — | | | — | | | 2,605 | |
| Included in OCI | | — | | | (5,284) | | | — | | | — | | | — | | | — | | | — | | | (5,284) | |
| Purchases / Originations | | 2,266,699 | | | — | | | — | | | — | | | — | | | — | | | — | | | 2,266,699 | |
| Sales | | (2,278,467) | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,278,467) | |
| | | | | | | | | | | | | | | | |
| Cash repayments / receipts | | (58,434) | | | (6,895) | | | (224) | | | — | | | — | | | — | | | (410) | | | (65,963) | |
| Transfers into Level III | | 93 | | | — | | | — | | | — | | | — | | | — | | | (203,880) | | | (203,787) | |
| Transfers out of Level III | | (373,111) | | | — | | | — | | | — | | | — | | | — | | | 54,610 | | | (318,501) | |
| | | | | | | | | | | | | | | | |
| Consolidation of VIEs | | — | | | — | | | — | | | — | | | — | | | 1,109,614 | | | (1,025,257) | | | 84,357 | |
| Deconsolidation of VIEs | | — | | | — | | | 530 | | | — | | | — | | | (730,012) | | | 959 | | | (728,523) | |
March 31, 2022 balance | | $ | 2,367,022 | | | $ | 134,406 | | | $ | 21,858 | | | $ | 1,264,160 | | | $ | 17,864 | | | $ | 57,763,543 | | | $ | (5,479,288) | | | $ | 56,089,565 | |
Amount of unrealized gains (losses) attributable to assets still held at March 31, 2022: | | | | | | | | | | | | | | | | |
| Included in earnings | | $ | (82,883) | | | $ | 2,605 | | | $ | (162) | | | $ | 223,851 | | | $ | 1,084 | | | $ | (3,896,602) | | | $ | 474,911 | | | $ | (3,277,196) | |
| Included in OCI | | $ | — | | | $ | (5,284) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | (5,284) | |
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.
The following table presents the fair values of our financial instruments not carried at fair value on the consolidated balance sheets (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Financial assets not carried at fair value: | | | | | | | |
| Loans | $ | 18,452,424 | | | $ | 18,241,160 | | | $ | 18,401,439 | | | $ | 18,215,072 | |
| HTM debt securities | 632,739 | | | 597,360 | | | 673,470 | | | 637,275 | |
| Financial liabilities not carried at fair value: | | | | | | | |
| Secured financing agreements, CLOs and SASB | $ | 18,519,771 | | | $ | 18,264,505 | | | $ | 18,177,756 | | | $ | 18,017,651 | |
| Unsecured senior notes | 2,331,445 | | | 2,164,549 | | | 2,329,211 | | | 2,199,135 | |
The following is quantitative information about significant unobservable inputs in our Level III measurements for those assets and liabilities measured at fair value on a recurring basis (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value at March 31, 2023 | | Valuation
Technique | | Unobservable
Input | | Range (Weighted Average) as of (1) |
| | | | March 31, 2023 | | December 31, 2022 |
| Loans under fair value option | $ | 2,810,889 | | | Discounted cash flow, market pricing | | Coupon (d) | | 2.8% - 9.3% (4.5%) | | 2.8% - 9.3% (4.5%) |
| | | | | Remaining contractual term (d) | | 5.0 - 39.3 years (28.0 years) | | 5.3 - 39.5 years (28.6 years) |
| | | | | FICO score (a) | | 585 - 900 (749) | | 585 - 900 (749) |
| | | | | LTV (b) | | 0% - 92% (67%) | | 4% - 92% (67%) |
| | | | | Purchase price (d) | | 80.0% - 108.6% (101.4%) | | 80.0% - 108.6% (101.4%) |
| RMBS | 111,069 | | | Discounted cash flow | | Constant prepayment rate (a) | | 2.8% - 12.0% (5.4%) | | 2.8% - 12.0% (5.5%) |
| | | | | Constant default rate (b) | | 1.0% - 4.7% (2.0%) | | 1.1% - 4.4% (2.0%) |
| | | | | Loss severity (b) | | 0% - 115% (24%) (f) | | 0% - 109% (24%) (f) |
| | | | | Delinquency rate (c) | | 6% - 27% (15%) | | 6% - 29% (16%) |
| | | | | Servicer advances (a) | | 30% - 81% (52%) | | 31% - 77.7% (53%) |
| | | | | Annual coupon deterioration (b) | | 0% - 2.7% (0.1%) | | 0% - 2.6% (0.1%) |
| | | | | Putback amount per projected total collateral loss (e) | | 0% - 8% (0.5%) | | 0% - 8% (0.5%) |
| CMBS | 18,945 | | | Discounted cash flow | | Yield (b) | | 0% - 515.8% (10.9%) | | 0% - 117.5% (10.1%) |
| | | | | Duration (c) | | 0 - 7.4 years (2.9 years) | | 0 - 7.7 years (3.0 years) |
| Woodstar Fund investments | 1,762,162 | | | Discounted cash flow | | Discount rate - properties (b) | | N/A | | 6.3% - 6.8% (6.5%) |
| | | | | Discount rate - debt (a) | | 5.4% - 7.2% (6.0%) | | 5.6% - 6.7% (6.1%) |
| | | | | Terminal capitalization rate (b) | | N/A | | 5.0% - 5.5% (5.1%) |
| | | | | Direct capitalization rate (b) | | 4.2% (4.2%) | | 4.2% (4.2%) (Implied) |
| Domestic servicing rights | 18,094 | | | Discounted cash flow | | Debt yield (a) | | 8.25% (8.25%) | | 8.25% (8.25%) |
| | | | | Discount rate (b) | | 15% (15%) | | 15% (15%) |
| VIE assets | 50,526,390 | | | Discounted cash flow | | Yield (b) | | 0% - 508.4% (15.8%) | | 0% - 453.6% (15.3%) |
| | | | | Duration (c) | | 0 - 10.7 years (2.4 years) | | 0 - 11.0 years (2.4 years) |
| VIE liabilities | 4,833,540 | | | Discounted cash flow | | Yield (b) | | 0% - 508.4% (10.3%) | | 0% - 453.6% (10.4%) |
| | | | | Duration (c) | | 0 - 10.7 years (2.0 years) | | 0 - 11.0 years (1.8 years) |
______________________________________________________________________________________________________________________
(1)Unobservable inputs were weighted by the relative carrying value of the instruments as of March 31, 2023 and December 31, 2022.
Information about Uncertainty of Fair Value Measurements
(a)Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.
(b)Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(c)Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (higher or lower) fair value measurement depending on the structural features of the security in question.
(d)This unobservable input is not subject to variability as of the respective reporting dates.
(e)Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our RMBS portfolio.
(f)11% and 10% of the portfolio falls within a range of 45% - 80% as of March 31, 2023 and December 31, 2022, respectively.
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 both March 31, 2023 and December 31, 2022, approximately $3.2 billion 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.
The following table is a reconciliation of our U.S. federal income tax provision determined using our statutory federal tax rate to our reported income tax (benefit) for the three months ended March 31, 2023 and 2022 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Federal statutory tax rate | $ | 10,703 | | | 21.0 | % | | $ | 80,191 | | | 21.0 | % | | | | | | | | |
| REIT and other non-taxable income | (17,727) | | | (34.8) | % | | (79,198) | | | (20.7) | % | | | | | | | | |
| State income taxes | (2,308) | | | (4.5) | % | | 326 | | | 0.1 | % | | | | | | | | |
| Federal benefit of state tax deduction | 485 | | | 1.0 | % | | (69) | | | — | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Intra-entity transfers | — | | | — | % | | (3,868) | | | (1.0) | % | | | | | | | | |
| Other | 52 | | | — | % | | 168 | | | — | % | | | | | | | | |
| Effective tax rate | $ | (8,795) | | | (17.3) | % | | $ | (2,450) | | | (0.6) | % | | | | | | | | |
For the three months ended March 31, 2023, we have utilized the discrete effective tax rate method, as allowed by ASC 740-270-30-18, “Income Taxes—Interim Reporting,” to calculate our interim income tax benefit. The discrete method is applied when the application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The discrete method treats the year to date period as if it was the annual period and determines the income tax expense or benefit on that basis. We believe that due to market dislocation and volatility, particularly with respect to the Company's residential assets that are housed in TRSs, the use of the discrete method is more appropriate at this time than the annual effective tax rate method due to the high degree of uncertainty in estimating annual pretax earnings.
22. Commitments and Contingencies
As of March 31, 2023, our Commercial and Residential Lending Segment had future commercial loan funding commitments totaling $2.3 billion, of which we expect to fund $2.0 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions.
As of March 31, 2023, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $136.8 million, including $121.3 million under revolvers and letters of credit (“LCs”), and $15.5 million under delayed draw term loans. As of March 31, 2023, $21.8 million of revolvers and LCs were outstanding. Additionally, as of March 31, 2023, our Infrastructure Lending Segment had outstanding loan purchase commitments of $18.0 million.
In connection with the Infrastructure Lending Segment acquisition, we assumed guarantees of certain borrowers’ performance under existing interest rate swaps. As of March 31, 2023, we had two outstanding guarantees on interest rate swaps maturing between June 2023 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.
23. Segment Data
In its operation of the business, management, including our chief operating decision maker, who is our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis prior to the impact of consolidating securitization VIEs under ASC 810. The segment information within this Note is reported on that basis.
The table below presents our results of operations for the three months ended March 31, 2023 by business segment (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and
Residential
Lending
Segment | | Infrastructure
Lending
Segment | | Property
Segment | | Investing
and Servicing
Segment | | Corporate | | Subtotal | | Securitization
VIEs | | Total |
| Revenues: | | | | | | | | | | | | | | | |
| Interest income from loans | $ | 375,601 | | | $ | 54,760 | | | $ | — | | | $ | 547 | | | $ | — | | | $ | 430,908 | | | $ | — | | | $ | 430,908 | |
| Interest income from investment securities | 32,521 | | | 1,338 | | | — | | | 22,785 | | | — | | | 56,644 | | | (38,007) | | | 18,637 | |
| Servicing fees | 159 | | | — | | | — | | | 9,834 | | | — | | | 9,993 | | | (2,737) | | | 7,256 | |
| Rental income | 1,981 | | | — | | | 23,695 | | | 6,613 | | | — | | | 32,289 | | | — | | | 32,289 | |
| Other revenues | 344 | | | 216 | | | 103 | | | 383 | | | 278 | | | 1,324 | | | — | | | 1,324 | |
| Total revenues | 410,606 | | | 56,314 | | | 23,798 | | | 40,162 | | | 278 | | | 531,158 | | | (40,744) | | | 490,414 | |
| Costs and expenses: | | | | | | | | | | | | | | | |
| Management fees | 218 | | | — | | | — | | | — | | | 39,322 | | | 39,540 | | | — | | | 39,540 | |
| Interest expense | 226,393 | | | 32,818 | | | 12,599 | | | 7,429 | | | 56,272 | | | 335,511 | | | (210) | | | 335,301 | |
| General and administrative | 11,893 | | | 3,964 | | | 952 | | | 20,047 | | | 5,252 | | | 42,108 | | | — | | | 42,108 | |
| Acquisition and investment pursuit costs | 207 | | | 8 | | | — | | | 54 | | | — | | | 269 | | | — | | | 269 | |
| Costs of rental operations | 2,451 | | | — | | | 5,549 | | | 3,666 | | | — | | | 11,666 | | | — | | | 11,666 | |
| Depreciation and amortization | 1,631 | | | 30 | | | 8,108 | | | 2,647 | | | — | | | 12,416 | | | — | | | 12,416 | |
| Credit loss provision, net | 30,790 | | | 12,404 | | | — | | | — | | | — | | | 43,194 | | | — | | | 43,194 | |
| Other expense | 832 | | | — | | | — | | | 16 | | | — | | | 848 | | | — | | | 848 | |
| Total costs and expenses | 274,415 | | | 49,224 | | | 27,208 | | | 33,859 | | | 100,846 | | | 485,552 | | | (210) | | | 485,342 | |
| Other income (loss): | | | | | | | | | | | | | | | |
| Change in net assets related to consolidated VIEs | — | | | — | | | — | | | — | | | — | | | — | | | 41,138 | | | 41,138 | |
| Change in fair value of servicing rights | — | | | — | | | — | | | (50) | | | — | | | (50) | | | 354 | | | 304 | |
| Change in fair value of investment securities, net | 14,866 | | | — | | | — | | | (14,459) | | | — | | | 407 | | | (325) | | | 82 | |
| Change in fair value of mortgage loans, net | 8,262 | | | — | | | — | | | 639 | | | — | | | 8,901 | | | — | | | 8,901 | |
| Income from affordable housing fund investments | — | | | — | | | 12,965 | | | — | | | — | | | 12,965 | | | — | | | 12,965 | |
| Earnings (loss) from unconsolidated entities | 939 | | | 1,740 | | | — | | | 679 | | | — | | | 3,358 | | | (633) | | | 2,725 | |
| Gain on sale of investments and other assets, net | — | | | — | | | — | | | 190 | | | — | | | 190 | | | — | | | 190 | |
| (Loss) gain on derivative financial instruments, net | (34,363) | | | (51) | | | (1,217) | | | (3,467) | | | 6,270 | | | (32,828) | | | — | | | (32,828) | |
| Foreign currency gain, net | 14,930 | | | 75 | | | 14 | | | — | | | — | | | 15,019 | | | — | | | 15,019 | |
| Loss on extinguishment of debt | (61) | | | — | | | — | | | — | | | — | | | (61) | | | — | | | (61) | |
| Other loss, net | (2,541) | | | — | | | — | | | — | | | — | | | (2,541) | | | — | | | (2,541) | |
| Total other income (loss) | 2,032 | | | 1,764 | | | 11,762 | | | (16,468) | | | 6,270 | | | 5,360 | | | 40,534 | | | 45,894 | |
| Income (loss) before income taxes | 138,223 | | | 8,854 | | | 8,352 | | | (10,165) | | | (94,298) | | | 50,966 | | | — | | | 50,966 | |
| Income tax benefit | 6,557 | | | 46 | | | — | | | 2,192 | | | — | | | 8,795 | | | — | | | 8,795 | |
| Net income (loss) | 144,780 | | | 8,900 | | | 8,352 | | | (7,973) | | | (94,298) | | | 59,761 | | | — | | | 59,761 | |
| Net income attributable to non-controlling interests | (3) | | | — | | | (6,978) | | | (806) | | | — | | | (7,787) | | | — | | | (7,787) | |
Net income (loss) attributable to Starwood Property Trust, Inc. | $ | 144,777 | | | $ | 8,900 | | | $ | 1,374 | | | $ | (8,779) | | | $ | (94,298) | | | $ | 51,974 | | | $ | — | | | $ | 51,974 | |
The table below presents our results of operations for the three months ended March 31, 2022 by business segment (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and
Residential
Lending
Segment | | Infrastructure
Lending
Segment | | Property
Segment | | Investing
and Servicing
Segment | | Corporate | | Subtotal | | Securitization
VIEs | | Total |
| Revenues: | | | | | | | | | | | | | | | |
| Interest income from loans | $ | 202,470 | | | $ | 26,983 | | | $ | — | | | $ | 4,166 | | | $ | — | | | $ | 233,619 | | | $ | — | | | $ | 233,619 | |
| Interest income from investment securities | 20,836 | | | 747 | | | — | | | 27,389 | | | — | | | 48,972 | | | (34,989) | | | 13,983 | |
| Servicing fees | 136 | | | — | | | — | | | 14,071 | | | — | | | 14,207 | | | (4,215) | | | 9,992 | |
| Rental income | 1,686 | | | — | | | 22,365 | | | 7,529 | | | — | | | 31,580 | | | — | | | 31,580 | |
| Other revenues | 52 | | | 68 | | | 50 | | | 4,654 | | | — | | | 4,824 | | | (6) | | | 4,818 | |
| Total revenues | 225,180 | | | 27,798 | | | 22,415 | | | 57,809 | | | — | | | 333,202 | | | (39,210) | | | 293,992 | |
| Costs and expenses: | | | | | | | | | | | | | | | |
| Management fees | 277 | | | — | | | — | | | — | | | 55,018 | | | 55,295 | | | — | | | 55,295 | |
| Interest expense | 68,602 | | | 11,930 | | | 6,081 | | | 6,210 | | | 33,842 | | | 126,665 | | | (214) | | | 126,451 | |
| General and administrative | 11,602 | | | 3,511 | | | 1,056 | | | 23,443 | | | 4,628 | | | 44,240 | | | 81 | | | 44,321 | |
| Acquisition and investment pursuit costs | 499 | | | 1 | | | 5 | | | (83) | | | — | | | 422 | | | — | | | 422 | |
| Costs of rental operations | 519 | | | — | | | 5,001 | | | 3,770 | | | — | | | 9,290 | | | — | | | 9,290 | |
| Depreciation and amortization | 294 | | | 105 | | | 8,219 | | | 3,029 | | | — | | | 11,647 | | | — | | | 11,647 | |
| Credit loss reversal, net | (3,299) | | | (359) | | | — | | | — | | | — | | | (3,658) | | | — | | | (3,658) | |
| Other expense | — | | | — | | | 55 | | | — | | | — | | | 55 | | | — | | | 55 | |
| Total costs and expenses | 78,494 | | | 15,188 | | | 20,417 | | | 36,369 | | | 93,488 | | | 243,956 | | | (133) | | | 243,823 | |
| Other income (loss): | | | | | | | | | | | | | | | |
| Change in net assets related to consolidated VIEs | — | | | — | | | — | | | — | | | — | | | — | | | 26,749 | | | 26,749 | |
| Change in fair value of servicing rights | — | | | — | | | — | | | (217) | | | — | | | (217) | | | 1,301 | | | 1,084 | |
| Change in fair value of investment securities, net | (2,105) | | | — | | | — | | | (9,291) | | | — | | | (11,396) | | | 11,041 | | | (355) | |
| Change in fair value of mortgage loans, net | (116,228) | | | — | | | — | | | (9,555) | | | — | | | (125,783) | | | — | | | (125,783) | |
| Income from affordable housing fund investments | — | | | — | | | 234,041 | | | — | | | — | | | 234,041 | | | — | | | 234,041 | |
| (Loss) earnings from unconsolidated entities | (1,340) | | | 345 | | | — | | | 151 | | | — | | | (844) | | | (66) | | | (910) | |
| Gain on sale of investments and other assets, net | 86,610 | | | — | | | — | | | 11,858 | | | — | | | 98,468 | | | — | | | 98,468 | |
| Gain (loss) on derivative financial instruments, net | 118,395 | | | 632 | | | 17,546 | | | 27,863 | | | (37,168) | | | 127,268 | | | — | | | 127,268 | |
| Foreign currency (loss) gain, net | (27,254) | | | (28) | | | 1 | | | — | | | — | | | (27,281) | | | — | | | (27,281) | |
| Loss on extinguishment of debt | (206) | | | (469) | | | — | | | (148) | | | — | | | (823) | | | — | | | (823) | |
| Other (loss) income, net | (788) | | | — | | | — | | | — | | | — | | | (788) | | | 25 | | | (763) | |
| Total other income (loss) | 57,084 | | | 480 | | | 251,588 | | | 20,661 | | | (37,168) | | | 292,645 | | | 39,050 | | | 331,695 | |
| Income (loss) before income taxes | 203,770 | | | 13,090 | | | 253,586 | | | 42,101 | | | (130,656) | | | 381,891 | | | (27) | | | 381,864 | |
| Income tax benefit (provision) | 5,140 | | | 4 | | | — | | | (2,694) | | | — | | | 2,450 | | | — | | | 2,450 | |
| Net income (loss) | 208,910 | | | 13,094 | | | 253,586 | | | 39,407 | | | (130,656) | | | 384,341 | | | (27) | | | 384,314 | |
| Net income attributable to non-controlling interests | (3) | | | — | | | (52,411) | | | (7,328) | | | — | | | (59,742) | | | 27 | | | (59,715) | |
Net income (loss) attributable to Starwood Property Trust, Inc. | $ | 208,907 | | | $ | 13,094 | | | $ | 201,175 | | | $ | 32,079 | | | $ | (130,656) | | | $ | 324,599 | | | $ | — | | | $ | 324,599 | |
The table below presents our consolidated balance sheet as of March 31, 2023 by business segment (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and
Residential
Lending
Segment | | Infrastructure
Lending
Segment | | Property
Segment | | Investing
and Servicing
Segment | | Corporate | | Subtotal | | Securitization
VIEs | | Total |
| Assets: | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 13,903 | | | $ | 30,948 | | | $ | 27,742 | | | $ | 16,910 | | | $ | 306,296 | | | $ | 395,799 | | | $ | — | | | $ | 395,799 | |
| Restricted cash | 9,872 | | | 33,848 | | | 943 | | | 4,632 | | | 86,342 | | | 135,637 | | | — | | | 135,637 | |
| Loans held-for-investment, net | 16,085,101 | | | 2,357,831 | | | — | | | 9,492 | | | — | | | 18,452,424 | | | — | | | 18,452,424 | |
| Loans held-for-sale | 2,733,358 | | | — | | | — | | | 77,531 | | | — | | | 2,810,889 | | | — | | | 2,810,889 | |
| Investment securities | 1,257,966 | | | 20,841 | | | — | | | 1,149,916 | | | — | | | 2,428,723 | | | (1,655,836) | | | 772,887 | |
| Properties, net | 464,183 | | | — | | | 860,220 | | | 119,576 | | | — | | | 1,443,979 | | | — | | | 1,443,979 | |
| Investments of consolidated affordable housing fund | — | | | — | | | 1,762,162 | | | — | | | — | | | 1,762,162 | | | — | | | 1,762,162 | |
| Investments in unconsolidated entities | 24,955 | | | 48,819 | | | — | | | 33,178 | | | — | | | 106,952 | | | (13,883) | | | 93,069 | |
| Goodwill | — | | | 119,409 | | | — | | | 140,437 | | | — | | | 259,846 | | | — | | | 259,846 | |
| Intangible assets | 11,273 | | | — | | | 28,442 | | | 65,785 | | | — | | | 105,500 | | | (38,704) | | | 66,796 | |
| Derivative assets | 90,967 | | | 219 | | | 3,025 | | | 2,408 | | | — | | | 96,619 | | | — | | | 96,619 | |
| Accrued interest receivable | 171,304 | | | 8,408 | | | 967 | | | 1,356 | | | 60 | | | 182,095 | | | (288) | | | 181,807 | |
| Other assets | 218,197 | | | 3,658 | | | 57,323 | | | 20,850 | | | 56,048 | | | 356,076 | | | — | | | 356,076 | |
| VIE assets, at fair value | — | | | — | | | — | | | — | | | — | | | — | | | 50,526,390 | | | 50,526,390 | |
| Total Assets | $ | 21,081,079 | | | $ | 2,623,981 | | | $ | 2,740,824 | | | $ | 1,642,071 | | | $ | 448,746 | | | $ | 28,536,701 | | | $ | 48,817,679 | | | $ | 77,354,380 | |
| Liabilities and Equity | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 154,121 | | | $ | 19,433 | | | $ | 13,601 | | | $ | 23,093 | | | $ | 67,082 | | | $ | 277,330 | | | $ | — | | | $ | 277,330 | |
| Related-party payable | — | | | — | | | — | | | — | | | 39,583 | | | 39,583 | | | — | | | 39,583 | |
| Dividends payable | — | | | — | | | — | | | — | | | 152,267 | | | 152,267 | | | — | | | 152,267 | |
| Derivative liabilities | 21,283 | | | 146 | | | — | | | — | | | 56,978 | | | 78,407 | | | — | | | 78,407 | |
| Secured financing agreements, net | 11,097,202 | | | 1,048,486 | | | 790,299 | | | 591,279 | | | 1,340,784 | | | 14,868,050 | | | (21,062) | | | 14,846,988 | |
| Collateralized loan obligations and single asset securitization, net | 2,858,185 | | | 814,598 | | | — | | | — | | | — | | | 3,672,783 | | | — | | | 3,672,783 | |
| Unsecured senior notes, net | — | | | — | | | — | | | — | | | 2,331,445 | | | 2,331,445 | | | — | | | 2,331,445 | |
| VIE liabilities, at fair value | — | | | — | | | — | | | — | | | — | | | — | | | 48,838,686 | | | 48,838,686 | |
| Total Liabilities | 14,130,791 | | | 1,882,663 | | | 803,900 | | | 614,372 | | | 3,988,139 | | | 21,419,865 | | | 48,817,624 | | | 70,237,489 | |
Temporary Equity: Redeemable non-controlling interests | — | | | — | | | 364,418 | | | — | | | — | | | 364,418 | | | — | | | 364,418 | |
| Permanent Equity: | | | | | | | | | | | | | | | |
| Starwood Property Trust, Inc. Stockholders’ Equity: | | | | | | | | | | | | | | | |
| Common stock | — | | | — | | | — | | | — | | | 3,197 | | | 3,197 | | | — | | | 3,197 | |
| Additional paid-in capital | 1,702,444 | | | 631,627 | | | (415,147) | | | (639,082) | | | 4,546,667 | | | 5,826,509 | | | — | | | 5,826,509 | |
| Treasury stock | — | | | — | | | — | | | — | | | (138,022) | | | (138,022) | | | — | | | (138,022) | |
| Retained earnings (accumulated deficit) | 5,227,875 | | | 109,691 | | | 1,779,019 | | | 1,505,340 | | | (7,951,235) | | | 670,690 | | | — | | | 670,690 | |
| Accumulated other comprehensive income | 19,851 | | | — | | | — | | | — | | | — | | | 19,851 | | | — | | | 19,851 | |
| Total Starwood Property Trust, Inc. Stockholders’ Equity | 6,950,170 | | | 741,318 | | | 1,363,872 | | | 866,258 | | | (3,539,393) | | | 6,382,225 | | | — | | | 6,382,225 | |
| Non-controlling interests in consolidated subsidiaries | 118 | | | — | | | 208,634 | | | 161,441 | | | — | | | 370,193 | | | 55 | | | 370,248 | |
| Total Permanent Equity | 6,950,288 | | | 741,318 | | | 1,572,506 | | | 1,027,699 | | | (3,539,393) | | | 6,752,418 | | | 55 | | | 6,752,473 | |
| Total Liabilities and Equity | $ | 21,081,079 | | | $ | 2,623,981 | | | $ | 2,740,824 | | | $ | 1,642,071 | | | $ | 448,746 | | | $ | 28,536,701 | | | $ | 48,817,679 | | | $ | 77,354,380 | |
The table below presents our consolidated balance sheet as of December 31, 2022 by business segment (amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial and
Residential
Lending
Segment | | Infrastructure
Lending
Segment | | Property
Segment | | Investing
and Servicing
Segment | | Corporate | | Subtotal | | Securitization
VIEs | | Total |
| Assets: | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 68,593 | | | $ | 31,153 | | | $ | 31,194 | | | $ | 39,023 | | | $ | 91,098 | | | $ | 261,061 | | | $ | — | | | $ | 261,061 | |
| Restricted cash | 18,556 | | | 31,133 | | | 981 | | | 5,259 | | | 65,143 | | | 121,072 | | | — | | | 121,072 | |
| Loans held-for-investment, net | 16,038,930 | | | 2,352,932 | | | — | | | 9,577 | | | — | | | 18,401,439 | | | — | | | 18,401,439 | |
| Loans held-for-sale | 2,763,458 | | | — | | | — | | | 21,136 | | | — | | | 2,784,594 | | | — | | | 2,784,594 | |
| Investment securities | 1,250,893 | | | 66,204 | | | — | | | 1,165,628 | | | — | | | 2,482,725 | | | (1,666,921) | | | 815,804 | |
| Properties, net | 463,492 | | | — | | | 864,778 | | | 121,716 | | | — | | | 1,449,986 | | | — | | | 1,449,986 | |
| Investments of consolidated affordable housing fund | — | | | — | | | 1,761,002 | | | — | | | — | | | 1,761,002 | | | — | | | 1,761,002 | |
| Investments in unconsolidated entities | 25,326 | | | 47,078 | | | — | | | 33,030 | | | — | | | 105,434 | | | (13,542) | | | 91,892 | |
| Goodwill | — | | | 119,409 | | | — | | | 140,437 | | | — | | | 259,846 | | | — | | | 259,846 | |
| Intangible assets | 11,908 | | | — | | | 29,613 | | | 66,310 | | | — | | | 107,831 | | | (39,058) | | | 68,773 | |
| Derivative assets | 101,082 | | | 122 | | | 1,803 | | | 5,614 | | | — | | | 108,621 | | | — | | | 108,621 | |
| Accrued interest receivable | 151,852 | | | 9,856 | | | 863 | | | 1,105 | | | 5,120 | | | 168,796 | | | (275) | | | 168,521 | |
| Other assets | 170,177 | | | 3,614 | | | 54,313 | | | 12,929 | | | 56,444 | | | 297,477 | | | — | | | 297,477 | |
| VIE assets, at fair value | — | | | — | | | — | | | — | | | — | | | — | | | 52,453,041 | | | 52,453,041 | |
| Total Assets | $ | 21,064,267 | | | $ | 2,661,501 | | | $ | 2,744,547 | | | $ | 1,621,764 | | | $ | 217,805 | | | $ | 28,309,884 | | | $ | 50,733,245 | | | $ | 79,043,129 | |
| Liabilities and Equity | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | |
| Accounts payable, accrued expenses and other liabilities | $ | 146,897 | | | $ | 20,656 | | | $ | 11,716 | | | $ | 46,377 | | | $ | 73,353 | | | $ | 298,999 | | | $ | — | | | $ | 298,999 | |
| Related-party payable | — | | | — | | | — | | | — | | | 41,186 | | | 41,186 | | | — | | | 41,186 | |
| Dividends payable | — | | | — | | | — | | | — | | | 151,511 | | | 151,511 | | | — | | | 151,511 | |
| Derivative liabilities | 21,523 | | | 105 | | | — | | | — | | | 69,776 | | | 91,404 | | | — | | | 91,404 | |
| Secured financing agreements, net | 10,804,970 | | | 1,042,679 | | | 789,719 | | | 543,256 | | | 1,342,074 | | | 14,522,698 | | | (21,166) | | | 14,501,532 | |
| Collateralized loan obligations and single asset securitization, net | 2,862,211 | | | 814,013 | | | — | | | — | | | — | | | 3,676,224 | | | — | | | 3,676,224 | |
| Unsecured senior notes, net | — | | | — | | | — | | | — | | | 2,329,211 | | | 2,329,211 | | | — | | | 2,329,211 | |
| VIE liabilities, at fair value | — | | | — | | | — | | | — | | | — | | | — | | | 50,754,355 | | | 50,754,355 | |
| Total Liabilities | 13,835,601 | | | 1,877,453 | | | 801,435 | | | 589,633 | | | 4,007,111 | | | 21,111,233 | | | 50,733,189 | | | 71,844,422 | |
Temporary Equity: Redeemable non-controlling interests | — | | | — | | | 362,790 | | | — | | | — | | | 362,790 | | | — | | | 362,790 | |
| Permanent Equity: | | | | | | | | | | | | | | | |
| Starwood Property Trust, Inc. Stockholders’ Equity: | | | | | | | | | | | | | | | |
| Common stock | — | | | — | | | — | | | — | | | 3,181 | | | 3,181 | | | — | | | 3,181 | |
| Additional paid-in capital | 2,124,496 | | | 683,258 | | | (405,955) | | | (646,662) | | | 4,051,950 | | | 5,807,087 | | | — | | | 5,807,087 | |
| Treasury stock | — | | | — | | | — | | | — | | | (138,022) | | | (138,022) | | | — | | | (138,022) | |
| Retained earnings (accumulated deficit) | 5,083,100 | | | 100,790 | | | 1,777,643 | | | 1,514,119 | | | (7,706,415) | | | 769,237 | | | — | | | 769,237 | |
| Accumulated other comprehensive income | 20,955 | | | — | | | — | | | — | | | — | | | 20,955 | | | — | | | 20,955 | |
| Total Starwood Property Trust, Inc. Stockholders’ Equity | 7,228,551 | | | 784,048 | | | 1,371,688 | | | 867,457 | | | (3,789,306) | | | 6,462,438 | | | — | | | 6,462,438 | |
| Non-controlling interests in consolidated subsidiaries | 115 | | | — | | | 208,634 | | | 164,674 | | | — | | | 373,423 | | | 56 | | | 373,479 | |
| Total Permanent Equity | 7,228,666 | | | 784,048 | | | 1,580,322 | | | 1,032,131 | | | (3,789,306) | | | 6,835,861 | | | 56 | | | 6,835,917 | |
| Total Liabilities and Equity | $ | 21,064,267 | | | $ | 2,661,501 | | | $ | 2,744,547 | | | $ | 1,621,764 | | | $ | 217,805 | | | $ | 28,309,884 | | | $ | 50,733,245 | | | $ | 79,043,129 | |
24. Subsequent Events
Our significant events subsequent to March 31, 2023 were as follows:
Convertible Senior Notes
On April 1, 2023, the entirety of our $250.0 million of 4.375% Convertible Senior Notes matured and was repaid in cash.