Starwood Property Trust Puts $0.48 Dividend Under Review After $369 Million Reserve Build

Starwood Property Trust (NYSE:STWD) reported distributable earnings of $0.31 per share for the third quarter, well below its $0.48 dividend, and Chairman and CEO Barry Sternlicht said the board will review the payout after higher rates drove a $369 million increase in loan-loss reserves.

Adjusted for realized gains and losses from commercial lending resolutions, the company earned $0.41 per share. That still leaves a gap with the dividend, and Sternlicht did not hide it. The dividend, he said, had been paid above the earnings rates the company produced in recent quarters, and management would weigh a cut now with room to raise it later as earnings recover. "I think there is a question of prudency," Sternlicht said. No decision was announced on the call — a caveat worth noting before any assumption of an imminent reduction.

What does management expect to earn?

President Jeff DiModica said the company had previously seen a path to covering the $0.48 payout within a few quarters. Current projections, based on what the company knows today, sit at or slightly above the $0.41 adjusted figure. Sternlicht called that number a reasonable base earnings rate, while adding he hoped it would rise as capital returns to productive investments. The promise is conditional; the base case is $0.41, not $0.48.

Why did reserves jump $369 million?

Chief Financial Officer Rina Paniry said reserves against commercial lending non-accrual loans and real estate owned rose by $369 million during the quarter. The total comprised:

• $822 million in current expected credit loss (CECL) reserves;
• $217 million in reserves on real estate owned;
• both reflected in undepreciated book value of $17.22 per share.

DiModica attributed most of the increase to higher interest rates fed into a third-party model. Higher projected rates raise borrowers' debt-service costs and cut refinancing proceeds, even when property operations improve. Substantially all of the increase landed in the general reserve.

The credit migration was concrete. Loans rated four increased by $290 million; five-rated loans rose by $440 million. Every downgrade in the quarter involved loans originated before 2023, and more than half involved multifamily properties.

Asked where reserves go next, DiModica declined to predict — and admitted management had not expected this quarter's build before the rate move. Sternlicht described the CECL calculation as a mechanical exercise based on the model. The number moves with rates, not necessarily with borrower defaults.

What happened to legacy assets?

Starwood resolved $254 million of non-accrual loans and real estate owned during the quarter, Paniry said. The detail matters:

• Two multifamily properties with an aggregate distributable earnings basis of $134 million sold for $97 million;
• Two units in a New York City residential project sold for $12 million;
• All sales closed in cash, without seller financing.

The company also returned the final $108 million portion of a Brooklyn office loan to accrual status after a lease brought the property to full occupancy. DiModica said Starwood restructured the loan to support leasing rather than pursue foreclosure.

There were no new non-accrual loans or foreclosures in the quarter. Management said it remained on track to exceed its $800 million resolution target for 2026, though Sternlicht cautioned some assets could take longer to resolve than previously hoped.

The legacy book remains large: loans originated before 2023 totaled $8.5 billion, or 40% of the loan portfolio and 20% of total assets. Of that, $3.8 billion carries a rating of four or five. More than two-thirds of the quarter's loan repayments came from pre-2023 originations.

How much is Starwood investing and holding?

The company 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; total undepreciated assets reached $32.3 billion. Liquidity stood at $1.1 billion, and the debt-to-undepreciated-equity ratio ended at 3.15 times.

Starwood repurchased $108 million of common stock in the quarter, lifting year-to-date repurchases to $138 million. DiModica said buybacks will be weighed against new investments and other uses of capital, and he saw potential acquisition opportunities across real estate investment trusts — though, again, no transaction was announced.

What is next for net lease and servicing?

The net lease portfolio stood at $2.8 billion across 534 properties in 44 states at 100% occupancy. Starwood cut overhead in the business during the quarter, making it accretive to distributable earnings per share. But Sternlicht said a high cost of capital limits growth, and the company will examine raising outside capital or spinning out the operation while continuing to invest in it.

Special servicer LNR generated $37 million in special servicing fees. DiModica said rate-related distress could support revenue growth in late 2027 and early 2028, noting assets typically stay with the servicer for 12 to 18 months.

The dividend question now sits with the board, and the $0.41 figure is the number to watch.