STWD - Starwood Property Trust: A Solid 10% Yield Waits For Dividend Investors

2023-10-03 08:57:04 ET

Summary

• Starwood Property Trust offers predictable dividend income and has a solid history of paying dividends over a long time frame.
• The commercial lender has considerable earnings power in its commercial and residential lending business.
• With shares dipping towards $19, Starwood Property stock presents a compelling buy-the-drop opportunity for dividend investors.

If you’re looking for stable and highly predictable dividend income, a close look at Starwood Property Trust ( STWD ) may literally pay big dividends going forward. The commercial lender is well-run, has a solid history of paying dividend investors a dividend and it has considerable earnings power related to its commercial and residential lending business. With shares of the REIT recently dipping towards $19, I believe dividend investors are faced with a compelling buy-the-drop situation as well as an attractive risk profile!

Previous rating

I covered Starwood Property about two and a half years ago which was when shares traded at above $25. I saw limited upside potential for the REIT at the time, which resulted in a hold rating, largely because of its relatively high valuation based off of book value. The REIT now makes a much more compelling value proposition, offers a well-performing commercial and residential lending business and currently presents dividend investors with an opportunity to harvest a solid 10% dividend yield.

Focus on commercial real estate and lending

Starwood Property is a commercial lender with a sizable lending business that has both a residential as well as a commercial orientation. Starwood Property owns other businesses as well including a lending business that is focused on infrastructure projects, a servicing business as well as direct property investments.

In total, the commercial lender owned $28B of various real estate assets, spread out over a number of different, complimentary service lines. The REIT’s core business nonetheless is commercial loans which represented 59% of all assets as of June 30, 2023. The REIT typically invests in a range of different categories of real estate such as offices, multi-family properties, hotels and even industrial properties.

Commercial and residential lending is how Starwood Property is making the majority of its money and the REIT has a large portfolio of First Mortgage loans. Commercial and residential lending achieved $181.8M in distributable earnings in Q2’23 which was eight times more than what the second-largest segment contributed: Investing/Servicing. On a per-share basis, commercial and residential lending alone produced $0.56 in distributable earnings in the second-quarter.

Starwood Property is paying a $0.48 per-share quarterly dividend… a dividend rate that has not been raised or lowered since 2014.

Based on the latest Q2’23 core earnings table, the commercial and residential lending segment alone managed to cover the REIT’s total quarter distribution.

In the last year, as well as in the years before that, Starwood Property fully earned its quarterly distribution.

(Source: Author)

Commercial lending chiefly consists of First Mortgages which represented the majority of the segment’s investments in the second-quarter. Other assets included Mezzanine Loans, CMBS and other Mortgages.

Starwood Property’s commercial loans are mostly paying variable interest rates, meaning the REIT is facing the prospects of net interest income tailwinds in a rising-rate world. As of June 30, 2023, 99% of Starwood Property’s commercial loans paid variable interest rates while only 1% of loans contained fixed interest rates.

Starwood Property’s valuation compared to rivals in the commercial lending business

When I last covered Starwood Property in 2021, the REIT just returned to its pre-COVID-19 valuation which made the shares expensive at the time. Other rivals like Blackstone Mortgage ( BXMT ) and Ladder Capital ( LADR ) also saw significant valuation gains. Recently, however, high-yielding REITs in the commercial mortgage market have seen a bit of a consolidation again which I believe represents a buy-the-drop opportunity. Starwood Property has a P/B ratio of 0.94X while Blackstone Mortgage and Ladder trade at slightly lower P/B ratios.

Starwood Property currently has the second-highest dividend yield, after Blackstone Mortgage. The dividend, in my opinion, is secured by sufficient income from the company's commercial and lending segment (as well as other businesses).

Risks with Starwood Property

I see some risks in Starwood Property’s commercial lending portfolio, especially with respect to those loans that are made to the office sector. This exposure, however, is small at 10% which suggests that the REIT is overall well-diversified and should be able to sustain its dividend pay-out. The biggest risk (for the shares) would be if the REIT saw insufficient dividend coverage. An unearned distribution would indicate that the risk of a dividend cut increased.

Final thoughts

Starwood Property is a well-run commercial lender and I believe what speaks greatly for the REIT is that it paid a $0.48 per-share quarterly dividend since 2014 and its dividend coverage looks good enough to risk a position at the current valuation, in my opinion. The recent drop in valuation is an attractive opportunity for those investors that look for a long-term entry into a strong dividend stock that currently pays a 10% yield.

While the REIT does have some risks related to the office sector, the risk profile for dividend investors looks favorable. Considering that Starwood Property also has net interest income upside related to its variable rate-paying commercial loans, the REIT is an attractive long term investment for dividend investors!

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