2023-04-10 09:00:00 ET
Summary
- STWD is trading at -17.31% of its book value, and its total equity on the balance sheet is 34.81% larger than its market cap, which is creating an interesting value proposition.
- STWD has dropped-27.88% in the past year, pushing its dividend yield past 11%.
- STWD has a strong track record of paying 36 consecutive quarterly dividends at $0.48 and with its distributable earnings being $2.28 the dividend has a 84.21% payout ratio.
When it comes to dividend investing, I don't mind allocating capital to a company that will trade sideways and pay a large yield. What I love is finding companies that are undervalued with oversized yields so I can capitalize on Mr. Market's mispricing. I believe there is a golden opportunity in Starwood Property Trust ( STWD ) as shares have continued to decline in 2023. Over the past year, shares of STWD have slid -27.88%, falling from $24.76 to $17.20. This has caused STWD's dividend yield to surpass the 10% mark, and shares are now yielding 11.16%. STWD has a strong dividend track record as the quarterly dividend has remained unchanged since March 2014, and since inception, the quarterly dividend has never been reduced. STWD continues to grow its business and is now trading at a -17.31% discount to book value. I plan on adding more shares of STWD as the current valuation has created a value proposition, and I can collect an oversized yield while waiting for the recovery.
Seeking Alpha
There is an opportunity in shares of STWD
From a business aspect, STWD is not on the decline, making the declining share price more attractive. In 2022 STWD produced $2.74 of GAAP earnings and $2.28 of distributable earnings on a per-share basis. STWD generated $871.48 million in net income, of which $726.3 million was distributable earnings. The dividend is $1.92 per share, which is well covered by an 84.21% coverage ratio based on distributable earnings. While the dividend yield has exceeded 11%, STWD isn't overextended and is producing more than enough earnings on a per-share basis to maintain its payments.
Currently, shares of STWD trade for $17.20 with a market cap of $5.34 billion. When looking at their balance sheet , STWD has $7.2 billion in total equity on the books, and the book value of each share is valued at $20.80. This is the largest amount of equity on the books in the past decade, with the 2 nd largest book value per share. Currently, with shares at $17.20, Mr. Market is discounting shares of STWD by -17.31% compared to its book value. STWD's total equity is also being discounted by -25.82% compared to its market cap.
I feel there is an opportunity here, as the dividend is fully covered, and STWD isn't making sacrifices to return capital to shareholders. There is a possibility for significant capital appreciation as shares would need to increase by more than 15% to trade at a 1:1 ratio to their book value. I think STWD is being grouped into the REIT selloff because it's a REIT and not because of the underlying fundamentals. For this reason, I am very bullish on STWD, as shares can easily rebound when the market is finished overreacting.
Starwood Property
Throughout a rising rate environment, STWD's business continued to thrive regardless of the declining share price
The company and a company's stock are 2 separate things. At the same time, STWD's share price declined -27.88% over the past year, and STWD as a company has thrived . STWD deployed $10.7 billion of capital toward new investments, which consisted of $9.3 billion of initial funding and $1.1 billion of follow-on funding. Throughout 2022, STWD had $3.7 billion of repayments and sales, including $1.9 billion from commercial lending, securitization proceeds of $3 billion, and newly issued corporate debt of $1.1 billion. STWD ended the 2022 fiscal year with $28.3 billion of total assets with a 2.5x debt-to-equity ratio. STWD has a strong balance sheet with $1.1 billion of liquidity and the ability to fund future growth projects through $8.4 billion of financing facilities and $3.9 billion of unencumbered assets. STWD planned on using $250 million of its cash on hand to repay convertible notes, which were maturing on 4/1/23.
From a business standpoint, STWD isn't skipping a beat. In 2022, STWD originated $5.3 billion of loans in its Commercial and Residential Lending segment, of which 56% was multifamily and industrial. STWD acquired $745 million of loans, including $713 million of agency investor loans in their residential business, bringing its on-balance sheet portfolio to $2.8 billion. In the property segment, STWD recorded an unrealized fair value increase related to this portfolio of $68 million in Q4, bringing 2022's non-controlling interest in at $555 million. The Investing and Servicing segment generated $1.2 billion across 9 securitizations in 2022 through the Starwood Mortgage Capital arm. STWD also obtained 4 new special servicing assignments totaling $4 billion during Q4 and 27 assignments totaling $24 billion across 2022, which increased its named servicing portfolio to $109 billion. STWD acquired $76 million of loans in Q4 through its Infrastructure Lending segment, bringing 2022's volume to $726 million. The portfolio balance in the Infrastructure Lending segment finished 2022 at $2.4 billion, which was 97% floating rate.
Starwood Property
STWD's dividend is large enough to protect shareholders from a declining share price
Since STWD's inception in 2009, its paid a quarterly dividend without cutting or reducing the dividend. STWD went public during the financial crisis and managed to increase its quarterly dividend 7 consecutive times from Q4 2009 to Q2 2011. In 2013 STWD provided an additional quarterly increase, then in 2014, STWD raised its quarterly dividend to $0.48, bringing its annual dividend to $1.92. STWD has paid 36 consecutive quarterly dividends of $0.48, establishing a strong track record, and the 37 th quarterly dividend of $0.48 is being paid on 4/14/23.
Seeking Alpha
As I shared in the past, STWD was the first REIT I invested in. I purchased 135 shares at the end of 2016. Since then, I have collected 24 consecutive dividends. I purchased my first lot of shares at $22.66, and since that purchase, the share price has been up and down, but as the share price has declined to $17.20 recently, my initial investment, excluding dividends, is down -24.09%. Due to STWD's consistent dividend, I am net positive on the investment, and my dividend income has increased considerably.
Since my first dividend in 2017, my original position in STWD has generated $2,040.36 in dividends. By reinvesting the dividends, I now have 237 shares in this account, as my share base has increased by 75.56%. Instead of being -24.09%, the dividends have provided a margin of safety, and the investment is currently up 33.26%.
In addition to providing a margin of safety, my projected dividend income has increased significantly. When I purchased my original 135 shares, the projected annual dividend income prior to compounding was $259.20. Today, the dividend remains unchanged as STWD still pays $1.92 per share, but since I reinvested the dividends, my new projected dividend income is $455.04 as my share base increased to 237 shares. My annual projected dividend income has increased by $195.84 or 75.56%.
After 6 full years of dividends, my quarterly dividend has grown from $64.60 to $108.82, which is an increase of $44.02 or 67.93%. The power of compound interest will grow as long as I continue to reinvest the dividends. Some would be upset with a declining share price, but I look at it as an opportunity to acquire shares of this great REIT at a lower price, and next week, the dividend in this account and the dividends in my other accounts will acquire more shares of STWD under book value.
Steven Fiorillo, Seeking Alpha
Conclusion
I think there is a big opportunity in shares of STWD for capital appreciation and generating income. STWD is trading at a -17.31% % discount to its book value and is generating a dividend that exceeds 11%. I think the selloff is overdone, and shares will be trading back in the $20s before 2023 is over. I will be adding to my positions in STWD throughout the year, and I am excited about the upcoming dividend to purchase shares at a significant discount to what I believe is their fair value. The power of compounding is real, and even though shares are below my initial purchase price, by reinvesting the dividends, I am up 33.26% on my initial investment, and my annual dividend income has increased by 75.56%. I am very bullish on STWD in the future.
For further details see:
Starwood Property Yields Near 11% With A Value Proposition (Rating Upgrade)