Starwood Property: Risky Dividend Setup (Rating Downgrade)

Core Viewpoint - Starwood Property (NYSE: STWD) reported a decent earnings performance for Q2, but the deterioration in its commercial and residential segments has raised concerns about its dividend sustainability, leading to a downgrade to hold status [1][3][16] Earnings Performance - Starwood Property's distributable earnings per share for Q2'24 were $0.48, fully supporting its dividend payout, but the distribution coverage ratio dropped to 100%, indicating a lack of safety margin [4][13] - The decline in distributable earnings was primarily due to a $43 million increase in credit loss provisions, with year-to-date provisions rising by $78 million [7][16] Dividend Coverage - The distribution coverage ratio fell by 23 percentage points quarter-over-quarter, highlighting increased risks to dividend continuity [4][16] - Starwood Property has maintained a consistent dividend of $0.48 per share since 2013, but the recent performance raises concerns about its reliability as a dividend payer [13][16] Portfolio Composition - Approximately 57% of Starwood Property's investments are in commercial loans, with only 10% in U.S. offices, reflecting a strategic shift away from the office sector [9][11] Valuation Metrics - Starwood Property is currently valued at a price-to-book ratio of 1.00x, which is comparable to Ladder Capital's 0.98x, indicating it is fairly valued despite the recent decline in distribution coverage [13][16] - The book value per share at the end of Q2 was $19.64 on a GAAP basis [13]