Moody's Upgrades Starwood Property Trust (STWD) to 'Ba2'; Outlook Stable

Moody's Investors Services upgraded the corporate family rating of Starwood Property Trust (NYSE: STWD) to Ba2 from Ba3, upgraded its secured term loan rating to Ba1 from Ba2, and assigned a Ba3 rating to the firm's private issuance of senior unsecured notes. The outlook for the ratings is stable.

Issuer: Starwood Property Trust, Inc.

..The following ratings have been upgraded:

.... Corporate Family Rating, to Ba2 from Ba3

.... Senior Secured Bank Credit Facility, to Ba1 from Ba2

....The following rating has been assigned:

....Long-term local currency debt rating, at Ba3

..Outlook Actions:

....Outlook, Remains Stable

RATINGS RATIONALE

Moody's upgraded Starwood's corporate family rating to reflect the company's improved access to unsecured funding, the increase in the company's unencumbered assets associated with the senior notes issuance and repayment of secured debt that increases its financial flexibility, as well as the company's growing revenue diversification as it expands its investment in high quality stabilized properties that generate long-term rental income. Other supporting rating considerations include Starwood's continued favorable credit performance and measured risk appetite, as well as its profitability and leverage measures that compare well with commercial real estate lender peers.

The notes issuance provides Starwood expanded access to unsecured investors that Moody's believes improves the firm's liquidity profile. However, Moody's expects that secured financing will remain the core of Starwood's funding profile, which limits its financial and operational flexibility. The company's credit profile would be further strengthened if it expanded the proportion of unsecured funding in its capital profile.

Starwood's unencumbered assets will increase significantly after the proposed transaction. Proceeds from the notes issuance, together with proceeds from a separate privately issued $300 million secured term loan, will be used to repay an existing $653 million secured term loan, which will result in a $2.1 billion increase in the company's unencumbered assets. Moody's expects that the firm's ratio of unencumbered assets to unsecured debt will increase on a pro forma basis to 1.8x from 0.9x, based on expected pro forma unencumbered assets of $3.3 billion.

Starwood's plans to increase equity real estate investments will diversify its revenues and cash flow sources and extend the average duration of its assets. The company has announced an agreement to acquire an $838 million portfolio of 38 medical properties, to be funded by long-term secured financing, and with an average remaining lease term of seven years. Moody's estimates that the acquisition will increase property investments to over 20% of the company's earning assets, up from 11% at the end of 2015. The company's growth in property investing increases its exposure to tenant and remarketing risks, but the firm has access to considerable property and risk management expertise within the broader Starwood group.

As measured by the ratio of debt to tangible net worth, Starwood's leverage has increased during 2016, but after considering the firm's $400 million equity issuance, launched today, its pro forma leverage remains essentially unchanged by the proposed transactions. Moody's expectations are that the company's leverage will remain meaningfully below 2.0x.

The Ba3 rating Moody's assigned to Starwood's unsecured notes reflect the notes senior priority within Starwood's capital structure, Starwood's high reliance on secured funding that structurally subordinates the claims of unsecured note holders to the company's secured debt, and the pro forma unencumbered asset coverage of the unsecured notes which mitigates the notes' potential loss given default. The transactions and ratings are subject to the execution of definitive closing documentation.

Moody's could upgrade Starwood's ratings if the company further diversifies its funding sources to include additional senior unsecured debt and less reliance on short-term funding sources, maintains strong, stable profitability and low credit losses, and maintains leverage of less than 2.0x.

Moody's could downgrade Starwood's ratings if the company encounters material liquidity challenges, its leverage materially increases, or its profitability significantly weakens.

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