Starwood Property Trust (STWD) is just three years old and already the company has carved out a dominant position in its sector of the REIT space. Investors currently earn an attractive dividend yield and there is potential for growth.
Starwood Property Trust is a commercial mortgage lender. The company both buys existing commercial mortgages and originates its own loans. The company went public in August 2009 after being created by the private investment firm, Starwood Capital Group. The IPO raised $900 million, providing the seed money to start a commercial mortgage firm from scratch.
Starwood Property Trust is the largest commercial mortgage REIT with a market cap of $2.5 billion. At the end of the 2012 first quarter, the company's loan portfolio was valued at $3.1 billion with $1.4 billion of leverage, leaving a net investment amount of $1.7 billion. The expected, leveraged return on the portfolio was calculated to be 12.6%. The portfolio is fairly evenly divided between purchased commercial real estate loans and originated loans. The hospitality sector is the largest customer sector, approaching half of the loans outstanding. The company plans to limit this sector to no more than 50% of its business.
Starwood Property Trust was created to take advantage of a multi-trillion dollar lending market where many of the players have folded or have restricted their commercial real estate lending. The company claims several advantages when making commercial mortgage loans:
The ability to make large loans is a competitive advantage, allowing the company to compete against fewer lenders. Starwood's average loan size is $65 million.
Funding from its own capital allows flexibility. Starwood Trust can tailor loans to meet customer needs/requests - and price the loans accordingly.
Starwood Property has the experience and brand recognition to get a shot at almost any large commercial real estate loan in the U.S.
The company works to keep a conservative portfolio with a current loan to value of about 65% and using its expertise to price loans at a level commensurate with the risk. The weighted average life of the portfolio is 3.5 years. The current loan origination rate is about $500 million per quarter. Starwood Property Trust appears to be building a strongly profitable business by offering products and services that competitors will not be able to match.
The biggest danger to Starwood Property Trust is another significant decline in the value of commercial real estate properties. The company's large exposure to hospitality leaves it susceptible to problems in the economy concerning which lead to less travel and problems for Starwood's hotel customers.
The Starwood Property Trust dividend has been at a 44 cents quarterly rate for the last five quarters with a resulting 8.1% yield. In 2012, the company has adjusted its dividend policy to pay a level distribution and make an additional dividend payment in the fourth quarter to bring the payout up to the REIT 90% of income requirement. Starwood Property has the potential to earn about $2.00 per share in 2012, producing the possibility of a total dividend for the year of $1.80. This is an investment with a high current yield and longer term, multi-year growth potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.