Starwood Property Trust (STWD) risk factors, FY2025 10-K

Risks Related to Our Relationship with Our Manager

1. 01There are various conflicts of interest in our relationship with Starwood Capital Group, including our Manager, which could result in decisions that are not in the best interests of our stockholders55% rewritten
2. 02discretion as to how investment opportunities are allocated. As a result, we may either not be presented with the opportunity to participate in these investments or may be limited in our ability to investNew
3. 03The management agreement with our Manager was not negotiated on an arm’s-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminateNew
4. 04Our Manager may terminate the management agreement annually upon 180 days prior notice. If the management agreement is terminated and no suitable replacement is found to manage us, we may not be able to continue to execute our business plan
5. 05The incentive fee payable to our Manager under the management agreement is payable quarterly and is based on our Distributable Earnings and, therefore, may cause our Manager to select investments in more risky assets to increase its incentive compensation
6. 06Our related party transaction policy may not adequately address all of the conflicts of interest that may arise with respect to our investment activities and also may limit the allocation of investments to us51% rewritten

Risks Related to the Company

1. 07We are subject to risk associated with pandemics, epidemics or other public health crises, which may have a material adverse effect on our business. The nature and extent of future impacts are highly uncertain and unpredictable
2. 08Provisions for credit losses are difficult to estimate81% rewritten
3. 09and expected market value of the collateral, all of which remain uncertain and are subjective. Our estimates and judgments may not be correct and, therefore, our results of operations and financial condition could be severely impactedNew
4. 10Our business may be adversely affected if our reputation, the reputation of our Manager or Starwood Capital Group, or the reputation of counterparties with whom we associate is harmed
5. 11We have not established a minimum distribution payment level and we may not be able to make distributions to our stockholders in the future at current levels or at all
6. 12As a result, distributions to our stockholders in the future may not continue or the level of any future distributions we do make to our stockholders may not achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect our stockholders’ return on investment

Risks Related to Sources of Financing

1. 13Our access to sources of financing may be limited and thus our ability to maximize our returns may be adversely affected
2. 14Our significant indebtedness subjects us to increased risk of loss and may reduce cash available for distributions to our stockholders
3. 15Interest rate fluctuations could significantly decrease our results of operations and cash flows and the market value of our investments
4. 16Warehouse facilities may limit our ability to acquire assets, and we may incur losses if the collateral is liquidated
5. 17The utilization of our repurchase agreements is subject to the pre-approval of the lender
6. 18A failure to comply with restrictive covenants in our financing arrangements would have a material adverse effect on us, and any future financings may require us to provide additional collateral or pay down debt
7. 19If one or more of our Manager’s executive officers are no longer employed by our Manager, the financial institutions providing us financing may not provide future financing to us, which could materially and adversely affect us
8. 20We directly or indirectly utilize non-recourse securitizations, and such structures expose us to risks that could result in losses to us
9. 21We may not have the ability to raise funds on acceptable terms necessary to settle conversions of our outstanding convertible senior notes or to purchase our outstanding convertible senior notes upon a fundamental change

Risks Related to Hedging

1. 22We enter into hedging transactions that could expose us to contingent liabilities in the future
2. 23Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders
3. 24In addition, we may fail to recalculate, readjust or execute hedges in an efficient manner
4. 25Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could result in material losses
5. 26We may fail to qualify for, or choose not to elect, hedge accounting treatment

Risks Related to Our Real Estate-Related Investments

1. 27The lack of liquidity in our investments may adversely affect our business
2. 28Our investments may be concentrated and are subject to risk of default
3. 29Difficult conditions in the mortgage, commercial and residential real estate markets may cause us to experience market losses related to our holdings
4. 30We have been and may continue to be adversely affected by trends in the office sector57% rewritten
5. 31Our preferred equity investments involve a greater risk of loss than conventional debt financing
6. 32Our commercial construction or rehabilitation lending may expose us to increased lending risks
7. 33The commercial mortgage loans we originate or acquire and the mortgage loans underlying our CMBS investments are subject to the ability of the commercial property owner to generate net income from operating the property, as well as the risks of delinquency and foreclosure
8. 34Our investments in CMBS are generally subject to losses
9. 35Dislocations, illiquidity and volatility in the market for commercial real estate as well as the broader financial markets could adversely affect the performance and value of commercial mortgage loans, the demand for CMBS and the value of CMBS investments
10. 36If we overestimate the yields or incorrectly price the risks of our investments, we may experience losses
11. 37Real estate valuation is inherently subjective and uncertain
12. 38Any investments in corporate bank debt and debt securities of commercial real estate operating or finance companies are subject to the specific risks relating to the particular companies and to the general risks of investing in real estate-related loans and securities, which may result in significant losses
13. 39Investments in non-conforming and non-investment grade rated loans or securities involve increased risk of loss
14. 40Any credit ratings assigned to our investments are subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded
15. 41The B-Notes that we acquire are subject to additional risks related to the privately negotiated structure and terms of the transaction, which may result in losses to us
16. 42Our mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties
17. 43Bridge loans involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured borrowers
18. 44We purchase securities backed by subprime or alternative documentation residential loans, which are subject to increased risks
19. 45We may acquire and sell from time to time residential loans, including “non-QM” loans, which may subject us to legal, regulatory and other risks, which could adversely impact our business and financial results
20. 46The residential loans that we may acquire, and that underlie the RMBS we acquire, are subject to risks particular to investments secured by mortgage loans on residential property. These risks are heightened because we may purchase non-performing loans
21. 47Our inability to promptly foreclose upon defaulted residential loans could increase our cost of doing business and/or diminish our expected return on investments
22. 48Prepayment rates may adversely affect the value of our investment portfolio85% rewritten
23. 49and financial markets and relative interest rates on fixed rate mortgage loans and adjustable rate mortgage loans (“ARMs”). Consequently, prepayment rates cannot be predictedNew
24. 50Interest rate mismatches between our agency RMBS backed by ARMs and our borrowings used to fund our purchases of these assets may reduce our net interest income and cause us to suffer a loss during periods of rising interest rates
25. 51We invest in distressed and non-performing commercial loans which could subject us to increased risks relative to performing loans, which may result in losses to us32% rewritten
26. 52certain circumstances, payments to us may be reclaimed if any such payment is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and insolvency lawsNew
27. 53Some of our portfolio investments are recorded at fair value and, as a result, there is uncertainty as to the value of these investments
28. 54We may experience a decline in the fair value of our assets
29. 55Liability relating to environmental matters may impact the value of properties that we may purchase or acquire
30. 56We invest in commercial properties subject to net leases, which could subject us to losses
31. 57In addition, net leases typically have longer lease terms and, thus, there is an increased risk that contractual rental increases in future years will fail to result in fair market rental rates during those years
32. 58Investments outside the U.S. that are denominated in foreign currencies subject us to foreign currency risks and to the uncertainty of foreign laws and markets, which may adversely affect our distributions and our REIT status
33. 59We invest in equity interests in commercial real estate assets, which subjects us to the general risks of owning commercial real estate
34. 60We face risks associated with acquisitions of commercial real estate assets
35. 61Government housing regulations may limit the opportunities at the affordable housing communities in which we invest, and failure to comply with resident qualification requirements may result in financial penalties or loss of benefits
36. 62We are subject to the general risks of owning properties relating to the healthcare industry
37. 63We have sponsored, and purchased the more junior securities of, CLOs and such instruments involve significant risks, including that these securities receive distributions from the applicable CLO only if the CLO generates enough income to first pay all the investors holding senior tranches and all CLO expenses
38. 64Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners

Risks Related to Our Infrastructure Lending Segment

1. 65The success of the Infrastructure Lending Segment depends, in part, on our ability to leverage the capabilities of Lotus Infrastructure Partners and Starwood Oil and Gas
2. 66We are subject to the risks of investing in infrastructure loans, many of which are outside our control, and that may negatively impact our business and financial results
3. 67The investment portfolio of our Infrastructure Lending Segment is concentrated in the power industry and, to a lesser extent, the midstream oil and gas industry, which subjects the portfolio to more risks than if the investments were more diversified
4. 68In addition to investments focused in the power industry, our portfolio also contains a concentration of investments related to projects in the midstream oil and gas industry, which also subjects us to certain risks inherent in the midstream oil and gas industry
5. 69We may have difficulty meeting our obligations on the unfunded commitments of the infrastructure loans, which could have a material adverse effect on us
6. 70The power and oil and gas industries are subject to extensive regulation, which could adversely impact the business and financial performance of the projects to which our infrastructure loans relate
7. 71We generally are not able to control the projects underlying our infrastructure loans
8. 72Operation of a project underlying an infrastructure loan involves significant risks and hazards that may impair the project company’s ability to repay the loan, resulting in its default, which could have a material adverse effect on our business and financial results
9. 73Loans to companies engaged in oil and gas exploration and production may be exposed to production risk and to commodity price risk

Risks Related to Our Investing and Servicing Segment

1. 74The business activities of our Investing and Servicing Segment, particularly our special servicing business, expose us to certain risks
2. 75The business activities in our Investing and Servicing Segment are subject to an evolving regulatory environment that may affect certain aspects of these activities
3. 76The risks of investment in subordinated CMBS are magnified in the case of our Investing and Servicing Segment, where the principal payments received by the CMBS trust are made in priority to the higher rated securities
4. 77The market value of CMBS could fluctuate materially as a result of various risks that are out of our control and may result in significant losses
5. 78Most of the assets in our Investing and Servicing Segment are held through a TRS, which is subject to entity level taxes on income that it earns. Taxes on income from such assets have materially increased the taxes paid by our TRSs

Risks Related to Our Organization and Structure

1. 79Certain provisions of Maryland law could inhibit changes in control
2. 80Our authorized but unissued shares of common and preferred stock may prevent a change in control
3. 81Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on our operations
4. 82Rapid changes in the values of our real estate-related and other investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the Investment Company Act
5. 83Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests
6. 84Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management
7. 85Ownership limitations may restrict change of control or business combination opportunities in which our stockholders might receive a premium for their shares

Risks Related to Taxation as a REIT

1. 86If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders
2. 87Ordinary dividends payable by REITs do not qualify for the reduced tax rates available for some corporate dividends21% rewritten
3. 88before the shares become ex-dividend, and cannot be under an obligation to make related payments with respect to a position in substantially similar or related property
4. 89REIT distribution requirements could adversely affect our ability to continue to execute our business plan
5. 90We may also be required under the terms of indebtedness that we incur to use cash received from interest payments to make principal payments on that indebtedness, with the effect of recognizing income but not having a corresponding amount of cash available for distribution to our stockholders
6. 91We may choose to make distributions to our stockholders in our own stock, or make a distribution of a subsidiary’s common stock, in which case our stockholders could be required to pay income taxes in excess of the cash dividends they receive
7. 92The stock ownership limit imposed by the Code for REITs and our charter may restrict our business combination opportunities
8. 93Even as a REIT, we may face tax liabilities that reduce our cash flow43% rewritten
9. 94Complying with REIT requirements may cause us to forgo otherwise attractive opportunities
10. 95Complying with REIT requirements may force us to liquidate otherwise attractive investments
11. 96The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT
12. 97We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
13. 98If any of our subsidiary REITs failed to qualify as a REIT, we could be subject to higher taxes, fail to remain qualified as a REIT and/or be subject to other adverse consequences
14. 99The “taxable mortgage pool” rules will increase the taxes that we, or our stockholders may, incur and limit our actions with respect to our taxable mortgage pools27% rewritten
15. 100The tax on prohibited transactions may limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, which would be treated as sales for U.S. federal income tax purposes
16. 101Our investments in construction loans require us to make estimates about the fair value of land and improvements that may be challenged by the IRS
17. 102The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT
18. 103Liquidation of assets may jeopardize our REIT qualification
19. 104Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities
20. 105Partnership tax audits could increase the tax liability borne by us in the event of a U.S. federal income tax audit of a subsidiary partnership
21. 106Legislative or other actions affecting REITs could materially and adversely affect us and our stockholders27% rewritten
22. 107Changes in accounting rules and other policy or regulatory changes could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against
23. 108Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price
24. 109Our board of directors has approved very broad investment guidelines for our Manager and does not approve each investment and financing decision made by our Manager
25. 110Our board of directors has in the past and may in the future at any time change one or more of our investment strategy or guidelines, financing strategy or leverage policies without stockholder consent
26. 111We operate in a highly competitive market for investment opportunities and competition may limit our ability to acquire desirable investments in our target assets and could also affect the pricing of these investment opportunities
27. 112Cybersecurity risks could result in the loss of data, interruptions in our business, damage to our reputation, and result in increased costs and financial losses that could have a material adverse effect on our business and results of operations23% rewritten
28. 113We utilize artificial intelligence tools in a limited and controlled manner, which may expose us to certain risks and could adversely affect our businessNew
29. 114We are subject to risks from natural disasters such as earthquakes, wildfires and severe weather which may result in damage to our properties21% rewritten
30. 115The market price and trading volume of our common stock could be volatile and the market price of our common stock could decline, resulting in a substantial or complete loss of your investment
31. 116There may be future dilution of our common stock as a result of additional issuances of our securities, which could adversely impact our stock price