Starwood: The Right REIT for Yield

07/03/2014 9:00 am EST

Focus: STOCKS

John Dobosz

Editor, Forbes Premium Income Report and Forbes Dividend Investor

With Fed Chair Janet Yellen emphasizing that the Fed is in no hurry to hike interest rates, real estate related ventures may are looking more attractive, suggests income expert John Dobosz, editor of Forbes Dividend Investor.

Starwood Property Trust (STWD) is a real estate investment trust (REIT). Founded in 2009, the Greenwich, Connecticut-based firm is the largest publicly traded commercial mortgage REIT in the US and is affiliated with Barry Sternlicht's Starwood Capital Group.

Sternlicht currently serves as chairman and CEO of STWD. Starwood originates, acquires, finances, and manages mortgage loans on a wide range of commercial properties, including banks, retail, hotels, condominiums, mixed-use properties. It also has smaller operations in residential mortgages.

Rising rates seem to be the nearly universal fear, and they are usually not good for REITs; typically, REITs trade at prices that move in the opposite direction of the yield on the 10-year Treasury note.

But Starwood, because it is also driven by an improving economy, is not as sensitive as many of its mortgage REIT peers to escalating yields.

Over the past year, it has handily outperformed the iShares Mortgage Real Estate mortgage REIT ETF benchmark. It's also outpaced fellow commercial REITs in the iShares Cohen & Steers Realty Majors ETF.

The shares tumbled after Starwood issued additional stock in April, but have since recovered back above the price before the offering on April 11.

Analysts expect Starwood's revenue in 2014—boosted by acquisitions—to surge 127% to $176.2 million. Funds from operations, a key measure of REIT profitability, have been rising steadily over the past five years.

Discounted valuations signal opportunity in Starwood. The REIT currently trades for 5.76 times revenue. That's a 34% discount to its three-year average price-to-sales ratio of 8.80.

The price-to-cash-flow multiple of 12.7 is a 14% discount to Starwood's five-year average multiple of 14.8 times cash from operations.

With the dividend history going back only five years, it is somewhat limited, but since it started paying out in 2009, Starwood has consistently hiked the payout. At its current quarterly rate of $0.48, Starwood's dividend yields just above 8%.

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