Starwood Property Trust Q2 Earnings Call Highlights

Key Points

• Q2 distributable earnings were $152 million, or $0.40 per share. Results remained pressured by non-accrual and real-estate-owned assets, although Starwood reported no new non-accrual loans, five-rated loans or REO assets.
• Starwood plans to resolve roughly $800 million of non-accrual and REO assets by the end of 2026. Expected third-quarter property sales would generate $148 million in cash proceeds and resolve $195 million of assets, but produce an estimated $47 million realized loss.
• The company deployed $2.5 billion during the quarter and $6.7 billion year to date, while extending corporate debt maturities and maintaining $1.2 billion of liquidity. Management acknowledged the dividend is currently uncovered but said asset resolutions, reinvestment and potentially increased share repurchases could help restore earnings coverage.

Starwood Property Trust NYSE: STWD reported second-quarter distributable earnings of $152 million, or $0.40 per share, as the company continued to work through non-accrual loans and real estate-owned assets while increasing investment activity and extending its debt maturities.

Chief Financial Officer Rina Paniry said results continued to reflect the earnings impact of non-accrual and REO assets, as well as elevated cash balances. The company reported no new non-accrual loans, no new five-rated loans and no new REO assets during the quarter or year to date.

“As our new non-accrual and REO loans have slowed, we have gained momentum in resolutions,” Paniry said.

Asset Resolutions and Reserve Position

Starwood Property Trust ended the quarter with approximately $1.9 billion of non-accrual and REO assets on a distributable-earnings basis, excluding $706 million of reserves already reflected in book value. The reserve total included $485 million of CECL reserves and $221 million of REO reserves.

The company expects to resolve roughly $800 million, or 40%, of its current non-accrual and REO balance by the end of 2026, subject to market conditions. It is under contract or in discussions to sell three REO properties and multiple units in a New York City residential project. Those transactions are expected to generate $148 million in cash proceeds and resolve $195 million of assets on a distributable-earnings basis during the third quarter.

Paniry said the anticipated sales are expected to produce an approximately $47 million realized loss in third-quarter distributable earnings. One asset was repriced following higher interest rates, creating a $12 million difference from its GAAP mark. Absent that adjustment, she said the company’s GAAP reserves aligned with expected sale prices.

President Jeff DiModica said three multifamily loans were downgraded to four-risk ratings during the quarter: a $73 million property in Phoenix, a $63 million property in Clearwater, Florida, and a $74 million property in Mesa, Arizona. He attributed the downgrades to higher forward rates and pressure on near-term cash flow in some Sun Belt multifamily markets following elevated supply.

Subsequent to quarter-end, two office loans repaid at par for a combined $171 million, reducing U.S. office exposure to 7.6% of assets and global office exposure to 8.9%, both company lows, according to DiModica.

Investment Activity and Segment Results

The company deployed $2.5 billion across its businesses during the second quarter and another $1.7 billion in July, bringing year-to-date investment activity to $6.7 billion. DiModica said the company was on pace for a record year of investment activity and expected the third quarter to be its strongest commercial-lending origination quarter.

Commercial and residential lending generated distributable earnings of $186 million, or $0.49 per share. In commercial lending, Starwood originated $1.4 billion and funded more than $1 billion, including preexisting commitments. Following $447 million of repayments, the funded loan portfolio reached a record $17.3 billion.

Infrastructure lending committed $441 million during the quarter, with the portfolio ending at $3.1 billion after comparable repayment activity. DiModica said 92% of the infrastructure portfolio was internally rated one or two, while 97% of loans had public or private Moody’s ratings.

The property segment contributed $34 million, or $0.09 per share, of distributable earnings. At Woodstar, the company’s Florida affordable-multifamily portfolio, Starwood began implementing authorized 8.4% HUD rent increases on July 1. The company expects the earnings benefit to begin appearing in third-quarter results.

Starwood also expects to refinance $416 million of Woodstar debt maturing within six months. Paniry said the company anticipates an approximately $140 million financing upsize, of which Starwood’s share would be about $110 million for reinvestment.

In net lease, distributable earnings rose to $0.05 per share from $0.03 in the prior quarter. The company acquired $179 million of properties during the quarter at a blended 7.39% capitalization rate. The portfolio totaled $2.7 billion across 527 properties in 44 states, with 100% occupancy, zero defaults and a weighted average lease term of 16.8 years.

Capital Markets and Liquidity

Starwood completed $2.1 billion of corporate debt transactions in the second quarter, including $1.1 billion of unsecured senior notes and a $275 million increase to its Term Loan B. It also repriced an existing $696 million term loan to SOFR plus 200 basis points.

After quarter-end, the company repaid $400 million of July 2026 notes and prepaid $500 million of January 2027 notes. DiModica said Starwood has no further corporate debt maturities until July 2027 and has extended weighted average corporate debt maturities to approximately three years.

The company had $1.2 billion of current liquidity at quarter-end and a debt-to-undepreciated-equity ratio of 2.74 times. Its unencumbered asset pool totaled $6.9 billion against $4.5 billion of unsecured debt.

Paniry said the early redemption of the January 2027 notes will produce a $6.3 million third-quarter loss on extinguishment of debt because of the termination of an associated interest-rate hedge. However, she said replacing the prior obligation with new 5.875% notes is expected to save more than $15 million over the next five years.

Dividend, Buybacks and Outlook

Chairman and Chief Executive Officer Barry Sternlicht acknowledged that the company is not currently earning enough to cover its dividend, but said management remains confident that resolving underperforming assets and redeploying capital into new investments can restore earnings power.

“We’re pretty confident in our ability to get back to the earnings power that we’ll need to drive the dividend and restore our coverage of dividend,” Sternlicht said.

He said the company is not considering a dividend-policy change at present, though it would revisit that position if conditions materially changed. Starwood repurchased $30 million of stock year to date under its $400 million authorization, and management indicated it could become more active in repurchases.

Looking ahead, Sternlicht said Starwood plans to discuss a new business line during its next quarterly update and continues to evaluate acquisition and sector-consolidation opportunities.

About Starwood Property Trust (NYSE:STWD)

Starwood Property Trust NYSE: STWD is a publicly traded real estate investment trust that specializes in originating, acquiring and managing commercial mortgage loans and other real estate-related investments. The company's portfolio spans a variety of asset classes, including senior mortgages, mezzanine debt, preferred equity and direct equity investments in commercial properties. By focusing on both debt and equity capital solutions, Starwood Property Trust seeks to generate attractive risk-adjusted returns for its shareholders through a combination of current income and capital appreciation.

Operating primarily in the United States, Starwood Property Trust deploys capital across a broad range of property types, such as multifamily residential, office, retail, hotel and industrial.

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