2023-03-05 05:47:44 ET
Summary
- Starwood Property earned its dividend with distributable earnings in the December quarter.
- The portfolio is diversified and offers passive income investors interest upside.
- Valuation reflects a high margin of safety.
Starwood Property Trust, Inc. ( STWD ) is a well-managed commercial real estate investment trust that paid out its dividend in full with distributable earnings in the fourth quarter.
Starwood Property has a growing and diverse investment portfolio comprised of commercial mortgage assets, and the trust's stock continues to trade at a discount to book value, which I believe is unjustified.
For nearly a decade, Starwood Property has paid a consistent dividend that has been covered by distributable earnings.
I recommend STWD to passive income investors because it is currently trading at a 10% dividend yield.
Starwood Property’s Portfolio Is Diversified And Well-Performing
Despite operating in a high-interest-rate environment, Starwood Property appears to have no trouble finding new investment opportunities. The commercial trust made $1.2 billion in new investments in the fourth quarter, including $1.2 billion in the commercial/residential lending segment, bringing the total for the year to $10.7 billion.
The commercial lending portfolio, where Starwood Property makes money by the bucketload, continued to be the largest income contributor in the fourth quarter. At the end of 4Q-22, the commercial lending portfolio was valued at $16.8 billion, with loans secured primarily by multi-family, office, and hotel properties.
Commercial Lending Portfolio (Starwood Property Trust)
Despite the fact that Starwood Property is a multi-line commercial trust with ancillary businesses such as Mortgage Servicing, Infrastructure Lending, and Direct Real Estate Investing, the commercial/residential lending segment continues to generate the majority of the company's distributable earnings (Property Segment).
Starwood Property generated $171.8 million in distributable profits from commercial/residential lending alone in the fourth quarter, representing 36% YoY growth. STWD's lending segment earned $0.53 per share in 4Q-22, accounting for 72% of total distributable profits earned across service lines.
Distributable Earnings (Starwood Property Trust)
A key feature of an STWD investment is that management has positioned the portfolio to benefit from increases in interest rates.
According to Starwood Property's most recent interest sensitivity table , a 100-basis-point increase in interest rates will increase annual net interest income by $39 million.
Given that inflation made a slight comeback in January (with consumer prices rising 0.5% month on month), I believe the market has underestimated the potential for rate hikes in 2023. If inflation is more resilient than expected, the Fed may deliver more than a 100-basis-point increase in 2023, which would benefit Starwood Property's commercial lending portfolio.
Annual Net Interest Income (Starwood Property Trust)
96% Dividend Coverage Ratio
In the December quarter, Starwood Property earned $0.50 per share in distributable earnings while paying out a consistent $0.48 per share in dividends to passive income investors.
In the fourth quarter, the trust's dividend pay-out ratio was 96%, which was the same as STWD's pay-out ratio over the previous twelve months. The dividend has consistently been covered by distributable earnings, primarily from the commercial real estate business, and in my opinion, passive income investors can have high confidence in Starwood Property's dividend.
Dividend (Author Created Table Using Company Supplements)
High Margin Of Safety
Starwood Property's stock trades at a discount to book value, which is yet another reason to consider the stock. For nearly ten years, Starwood Property has paid a $0.48 per share quarterly dividend and grown its investment portfolio, demonstrating strong investment and execution skills.
STWD is currently trading at a 7% discount to book value, despite previously trading at a premium to book value. Given that STWD consistently covers its dividend with distributable earnings, the valuation multiple reflects a high margin of safety.
Price To Book Value (YCharts)
Why Starwood Property Could See A Lower Valuation
If the commercial real estate market falls into a slump, Starwood Property may face challenges.
High interest rates may also dampen mortgage demand , which could harm Starwood Property's origination business. Given that Starwood Property was an active buyer of real estate assets during the previous recession, I believe the company will be able to leverage its financial capacity and go on a buying spree if commercial real estate corrects to the downside in 2023.
My Conclusion
I believe there is an opportunity for passive income investors to take advantage of the current weakness in the stock price of Starwood Property and purchase the covered 10% dividend yield that the market is making available.
I have great faith in Starwood Property's management and dividend, as the trust has a ten-year pay-out history that includes the Covid-19 pandemic.
STWD, in my opinion, is an excellent holding for passive income investors seeking exposure to the commercial real estate market in the United States while also generating interest rate exposure.
Since Starwood Property also paid a dividend with distributable earnings in 4Q-22, I believe investors can rest easy with STWD in their portfolios.
For further details see:
Starwood Property: You Can Now Get A 10% Yield Again