Summary
- Starwood Property Trust is a multi-cylinder commercial mortgage REIT with different lines of business.
- It has strong portfolio metrics and management is pivoting towards safer asset classes such as multifamily.
- The recent drop in share price has pushed the dividend yield close to 10%, making the stock attractive for high yield investors.
It seems like every week there is a once sturdy dividend payer that disappoints investors with a cut. Such has been the case with names like V.F. Corp. ( VFC ) and Intel ( INTC ), both of which slashed their dividend payouts by material amounts recently.
While I don't take dividend cuts in a vacuum and would prefer to value a company from a holistic lens, it's nonetheless disappointing for those investors who rely on income.
That's why it pays to have healthy allocation to income vehicles such as REITs, BDCs, and MLPs, which are designed for rewarding shareholders with 90% of the pre-tax earnings in the form of distributions, pure and simple.
This brings me to Starwood Property Trust ( STWD ), whose share price has seen its share of ups and downs over the past 12 months and is once again in a valley, pushing its dividend yield close to the 10% mark. Let's explore what makes now a good time to layer into this high income vehicle.
STWD Stock (Seeking Alpha)
Why STWD?
Starwood Property Trust was founded over three decades ago, and is led by its long-time CEO and Chairman, Barry Sternlicht, who has been in the real estate business for most of his career. Since its founding, STWD has deployed over $90 billion in capital and, at present, manages a portfolio of $27.5 billion in total assets.
STWD differentiates itself from peers like Blackstone Mortgage Trust ( BXMT ) with its multi-cylinder model of doing commercial loans, infrastructure loans, and owning physical real estate. This diversified model gives STWD a distinct advantage, as it's able to tap into multiple sources of income and opportunistically allocate capital towards the ups and downs of each segment.
Nonetheless, commercial loans remain STWD's bread and butter business, and it benefits from managements' combined decades worth of experience. This portfolio carries quality characteristics, with 100% interest collection in the last reported quarter, and 92% senior secured first mortgage loan. This provides it with a cushion of protection, with it being first in line to collect the principal on those loans in the event of a borrower default.
Borrowers also have significant skin in the game, as the commercial loan portfolio comes with a decent loan to value ratio of 60%, implying that an underlying property would need to decline in fair market value by 40% before STWD begins to incur losses. Management is also making moves to de-risk the portfolio by reducing exposure to higher risk assets such as office while increasing exposure to growing asset classes, as noted during the last conference call :
34% of our CRE loan portfolio is on multifamily assets, among the highest in our peer group, and our office exposure is down from 38% of our portfolio pre-COVID to just 23% today, among the lowest of our peer group. The credit quality of our portfolio remains strong at a 2.6 rating on a 5 scale.
The bulk of our Manhattan exposure is secured by for-sale condominiums with world-class sponsors, a 40% loan to value and a blended maturity date over four years from now. So, we have a lot of runway and are very comfortable niche positions. Finally, 96% of the loan portfolio has rate caps or other structural enhancements, guarantees or reserves to protect their ability to pay us in a rising rate environment.
Moreover, like its peers, STWD benefits from higher interest rates, as 99% of its commercial loan portfolio is floating rate. This resulted in $14 million in incremental net investment income in the last reported quarter, and enabled STWD to meaningfully out-earn its $0.48 quarterly dividend with distributable earnings per share of $0.51.
Meanwhile, STWD is well-positioned with a relatively strong debt to equity ratio of 2.4x for a commercial mortgage REIT. The recent price drop also makes the stock attractive. At the current price of $19.43, shares of STWD can be had at a price to undepreciated book ratio of 0.89x.
Analysts have a consensus Buy rating on the stock with an average price target of $23.86, implying strong capital appreciation potential combined with a 9.9% dividend yield.
Seeking Alpha
Investor Takeaway
STWD stock is an attractive choice at present for investors looking to deploy capital into a high-yield vehicle. The company benefits from its diversified model, with commercial loans being the main driver, and carries solid portfolio metrics.
Management is also pivoting the portfolio towards safer asset classes and the high dividend is more than covered by distributable earnings. As such, I find the recent price drop as presenting a good opportunity for high yield investors in a well-diversified portfolio.
For further details see:
Starwood Property: Back In Value Zone