Summary
- I doubled down on STWD at $19.10.
- The CRE trust offers investors a covered 10% dividend yield.
- The stock is now trading at a discount to book value.
At the current price and yield, Starwood Property Trust Inc. ( STWD ) presents such a compelling investment opportunity that I have doubled my position in the commercial mortgage real estate investment trust and am issuing a rare 'Strong Buy Alert.'
In the midst of a broad market selloff, even high-quality real estate investment trusts with track records of strong and covered dividends have been punished recently.
Starwood Property Trust, in my opinion, is an exceptionally safe investment in the commercial real estate market, and its stock is trading at a discount to book value. Buy with confidence.
Technical Sentiment Screams: Buy, Buy, Buy
I'm not a technical investor, but when I see a good deal and the stock is oversold according to the Relative Strength Index, I don't think twice about buying it.
One example is commercial real estate behemoth Starwood Property, whose stock plummeted this week amid fears of a more aggressive interest rate hike cycle on the part of the central bank. As a result of this chaos, the Dow Jones Industrial Index fell to its lowest level this year, dragging down a slew of high-quality stocks with it.
According to the Relative Strength Index, Starwood Property became oversold at the end of September, and while the RSI now indicates that sentiment has recovered slightly, there is still an opportunity to profit from the selloff, in my opinion. I bought the selloff around $19, giving me a covered and sustainable 10% yield on my third Starwood Property investment.
RSI (StockCharts.com)
Here are four very good reasons why you should consider buying the STWD dip.
The first reason is that Starwood Property invests not only in commercial real estate loans, which provide recurring interest income, but also in a residential loan portfolio, a servicing business, and a real estate portfolio, providing a diverse business. Despite its size, Starwood Property's commercial lending portfolio accounts for only 69% of the trust's distributable earnings before corporate expenses.
In 2Q-22, the commercial and residential lending portfolio generated
$0.48 per share of Starwood Property's distributable earnings (69%), the servicing segment generated $0.11 per share (16%), property investing generated $0.07 per share (10%), and infrastructure lending generated
$0.04 per share (6%).
The diversification of Starwood Property's business model provides the trust with significant credibility and protection in the event that origination volumes decline as a result of a deeper real estate recession in the United States market.
Distributable Earnings (Starwood Property Trust)
The second reason to consider STWD is higher interest rates, which are beneficial to Starwood Property because the trust has heavily invested in floating rate loans in its lending segment.
This is significant because recent market volatility has been fueled by worries about the central bank's more aggressive stance on short-term interest rates.
Higher interest rates benefit Starwood Property, and a 100-basis-point increase in interest rates would result in an additional $33 million in annual net interest income, according to the trust's interest rate sensitivity schedule.
Annual Net Interest Income (Starwood Property Trust)
The third reason to buy Starwood Property now is that the pay-out is very safe, and the current yield of 10% exaggerates the risk normally associated with STWD. As I previously stated , Starwood Property's pay-out ratio in the previous year was 92%, and the trust has paid a $0.48 per share quarterly dividend since 2014.
The fourth reason I would recommend buying STWD is that it is not only a high-quality dividend stock based on the length of its pay-out record, but it has also resumed trading at a discount to book value, which is unusual for Starwood Property.
The trust is universally admired by investors for its high-quality dividend, and if such a dividend can be bought at a discount, the better. STWD is currently trading at a 5% discount to book value, which is significantly lower than the historical average.
Why Starwood Property Might See A Lower Valuation
The overall health of the commercial real estate market has the greatest impact on Starwood Property's valuation. Starwood Property's commercial origination volume was strong in the second quarter ($2.2 billion in 2Q-22), and higher interest rates have so far had no negative impact on the trust's originations. This could change if the central bank continues to raise interest rates above what the market considers reasonable.
My Conclusion
This is your second opportunity in a year to purchase Starwood Property's exceptionally attractive 10% yield at a discount to book value.
Despite the fact that sentiment indicators indicate that STWD is no longer oversold, at least according to the Relative Strength Index, the stock is trading at a 5% discount to book value, which is historically unusual.
STWD has mostly traded at a premium to book value over time, a reflection of the market's high regard for the trust's dividend.
Because Starwood Property is well-diversified, well-managed, and its dividend is covered by distributable earnings, I believe investors should consider doubling down on STWD.
For further details see:
Starwood Property: I Am Getting A 10% Yield On My Last Purchase