Starwood Property Trust’s GAAP net income fell 95% in the second quarter, dropping to $6.6 million from $129.8 million a year earlier, even as the commercial mortgage REIT’s preferred profitability measure held essentially flat, the company reported for the quarter ended June 30. GAAP earnings per diluted share came in at 1 cent, down from 38 cents in the year-ago quarter, on revenue of $513.7 million.
The gap between the GAAP figure and the company’s underlying performance traces to its corporate segment, which posted a $175.7 million net loss for the quarter — the single largest swing in Starwood’s results. By contrast, the company’s core lending businesses stayed solidly profitable: commercial and residential lending contributed $133.9 million in net income, infrastructure lending added $26.1 million, and investing and servicing contributed $24.5 million. The property segment was roughly break-even, posting a $2.2 million loss.
Distributable earnings hold steady
Distributable earnings, the non-GAAP measure Starwood and most commercial mortgage REITs emphasize for dividend coverage, came in at $151.5 million, or 40 cents per diluted share — essentially unchanged from $151.1 million a year earlier. The board declared a dividend of 48 cents per share. Starwood also disclosed a $30.2 million credit loss provision for the quarter ($29.8 million year-to-date) and said management expects to resolve approximately $900 million in underperforming assets by year-end, a signal the company is actively working through troubled loans rather than letting them linger on the balance sheet.
“Real estate fundamentals are improving steadily in almost every asset class, supported by a drop in construction and broad and robust economic growth,” CEO Barry Sternlicht said in the release. President Jeffrey DiModica pointed to balance-sheet improvements, noting the company extended its weighted average corporate debt maturity to 3.7 years.
Scale and capital activity
Starwood ended the quarter with $31.8 billion in total assets, including $17.3 billion in commercial lending assets, and has deployed $120 billion in capital since its inception. The company said it committed $6.7 billion to new investments through July at double-digit returns on equity, and repurchased $30 million of its own shares over the first six months of the year.
Starwood’s results land alongside a mixed earnings season for commercial mortgage REITs: Blackstone Mortgage Trust posted a Q2 net loss tied to a Chicago office loan reserve, underscoring that credit issues tied to specific troubled loans, rather than the sector broadly, are driving the sharpest swings in reported earnings this quarter.
What it means: The 95% GAAP decline looks dramatic but is concentrated almost entirely in Starwood’s corporate segment rather than its lending operations, and distributable earnings — the figure that funds the dividend — were essentially unchanged year over year. Whether the $900 million in underperforming assets resolves smoothly by year-end, as management projects, will be the clearer test of credit quality in Starwood’s core loan book.
