Starwood Property Trust NYSE: STWD will review its dividend with its board after higher interest rates increased pressure on some borrowers and contributed to a sharp rise in loan-loss reserves, Chairman and CEO Barry Sternlicht said on the company’s third-quarter earnings call.
The real estate investment trust reported distributable earnings of $0.31 per share for the quarter, or $0.41 per share excluding realized gains and losses from commercial lending resolutions. Sternlicht said the dividend had been paid above the earnings rates the company produced in recent quarters and that management would consider whether to reduce it and increase it later as earnings recover.
“I think there is a question of prudency,” Sternlicht said. No dividend decision was announced on the call.
President Jeff DiModica said the company had previously seen a path to earning the $0.48 per share it was paying out within a few quarters. He said current projections were at or slightly above the $0.41 adjusted distributable earnings figure, based on what the company knows today. Sternlicht called that figure a reasonable base earnings rate, while saying he hoped it would rise as capital is returned to productive investments.
Higher Rates Drive Reserve Increase
Chief Financial Officer Rina Paniry said reserves against commercial lending non-accrual loans and real estate owned increased by $369 million during the quarter. The total comprised $822 million in current expected credit loss, or CECL, reserves and $217 million in reserves on real estate owned. Those reserves were reflected in undepreciated book value of $17.22 per share.
DiModica said most of the increase was driven by higher interest rates incorporated into a third-party model. Higher projected rates can increase borrowers’ debt-service costs and reduce refinancing proceeds, even when property operations improve, he said. Substantially all of the increase was in the general reserve.
The balance of loans rated four increased by $290 million, while five-rated loans rose by $440 million. All downgrades during the quarter involved loans originated before 2023, and more than half involved multifamily properties, DiModica said.
Asked where reserves might go from here, DiModica said the company could not predict the outcome, noting that management had not expected the quarter’s reserve build before the rate move. Sternlicht said the CECL calculation was a mechanical exercise based on the model.
Legacy Asset Resolutions Continue
Starwood resolved $254 million of non-accrual loans and real estate owned during the quarter, Paniry said. That included the sale of two multifamily properties with an aggregate distributable earnings basis of $134 million for $97 million, as well as the sale of two units in a New York City residential project for $12 million. The sales were completed in cash without seller financing.
The company also returned the final $108 million portion of a Brooklyn office loan to accrual status after securing a lease that brought the property to full occupancy. DiModica said Starwood had restructured the loan to support leasing rather than pursue foreclosure.
There were no new non-accrual loans or foreclosures in the quarter, DiModica said. Management said it remained on track to exceed its previously stated $800 million resolution target for 2026, while Sternlicht cautioned that some assets could take longer to resolve than previously hoped.
Loans originated before 2023 totaled $8.5 billion, representing 40% of the loan portfolio or 20% of total assets, DiModica said. Of that amount, $3.8 billion was rated four or five. More than two-thirds of the company’s loan repayments during the quarter came from loans originated before 2023.
Investment Activity and Liquidity
Starwood invested $3.2 billion across its businesses during the quarter, including $2.4 billion of commercial lending originations. Its commercial lending portfolio grew to a record $17.8 billion, while total undepreciated assets reached $32.3 billion.
The company had $1.1 billion in liquidity and ended the quarter with a debt-to-undepreciated-equity ratio of 3.15 times, Paniry said. Starwood repurchased $108 million of common stock during the quarter, bringing year-to-date repurchases to $138 million.
DiModica said the company would continue to weigh buybacks against new investments and other uses of capital. In response to an analyst question, he also said he saw potential acquisition opportunities across real estate investment trusts, though no transaction was announced.
Net Lease and Servicing Outlook
Starwood’s net lease portfolio stood at $2.8 billion, with 534 properties across 44 states and 100% occupancy, Paniry said. The company reduced overhead in the business during the quarter, making it accretive to distributable earnings per share.
Sternlicht said the business faced a high cost of capital that limited its ability to grow. He said raising outside capital or spinning out the operation were options the company would examine, while emphasizing that management wanted to continue investing in it.
Starwood’s special servicer, LNR, generated $37 million in special servicing fees during the quarter. DiModica said rate-related distress could support revenue growth in late 2027 and early 2028, noting that assets typically remain with the servicer for 12 to 18 months.
About Starwood Property Trust (NYSE:STWD)
Starwood Property Trust, Inc is a real estate investment trust that focuses on commercial real estate finance and related investments. The company originates, acquires, and manages a range of real estate debt and equity investments, serving institutional borrowers, property owners, and developers.
Its portfolio and lending activities include senior mortgage loans, mezzanine debt, subordinated loans, preferred equity, commercial mortgage-backed securities, and other structured real estate investments.
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