Sternlicht and Starwood: Stars in Real Estate

07/01/2015 7:00 am EST

Focus: REITS

Khoa Nguyen

Investment Analyst, Investing Daily

Barry Sternlicht is a renowned real estate mogul for his innovative ideas for building businesses and some stellar properties, explains Khoa Nguyen, editor of Global Income Edge.

His privately-owned Starwood Capital Group is now the biggest and most successful real estate company in the United States.

Starwood Hotels & Resorts Worldwide (HOT) owns hotel chains including Sheraton, St. Regis, and the Westin.

In 2009, at the height of the Great Recession, many firms were dumping beaten down properties in the troubled real estate market.

Sternlicht, however, leaped into the void and launched Starwood Property Trust (STWD), which invests in commercial mortgage loans and debt.

When it went public in 2009, Starwood’s market value was $1 billion; it is now worth about $5.5 billion.

Sternlicht has proven himself to be a shrewd investor with a knack for identifying and profiting from real estate properties.

However, there’s nothing magical about his approach. He’s data-driven and pragmatic and has been known to pass on deals due to new information.

Some of Starwood’s recent loans include the $300 million refinancing of an office building in Soho, New York and a $309 million first mortgage and refinance of an office building in London.

The company recently announced a $508 million acquisition of office and multifamily assets in Ireland. The portfolio includes 12 office properties and one multifamily residential property in Dublin.

This year started off strong for the company. Starwood’s core earnings of $123.7 million, or $0.55 per share, were up 10% from last year.

During the quarter, Starwood invested $1.2 billion in new acquisitions and loan originations, which should continue to drive core earnings growth.

Because REITs are required to pay 90% of earnings to investors, the increase in earnings means it’s only a matter of time before Starwood hikes its distributions.

For 2015, Starwood Property Trust also updated its guidance to $2.05 to $2.25 core earnings per share.

There are fears that rising interest rates will hurt REITs, but a majority of Starwood’s lending activities are floating-rate, which will rise along with market rates.

Roughly 80% of its lending segment’s existing loan portfolio and 100% of its current loan pipelines are indexed to LIBOR.

Starwood is trading at 11 times estimated 2015 core earnings, which is a bargain considering it offers a well-covered 8.3% yield. Buy Starwood Property Trust below $32.

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