Starwood Property Trust (STWD): 2019 Top Picks' Mid-Year Update

07/22/2019 5:00 am EST

Focus: REITS

Tim Plaehn

Investment Research Analyst, Investors Alley

Tim Plaehn, income specialist and editor of The Dividend Hunter, chose Starwood Property Trust (STWD) as his top conservative investment idea for 2019. The stock rose 15.2%% in the first half of the year. Here's his latest update on this commercial property REIT.

For the first half of the year, the stock produced a 21.3% total return. The big Q1 recovery for all stocks propelled the share price and the 8% plus dividend yield gives a solid base return.

Starwood Property Trust is a finance REIT whose primary business is the origination of commercial property mortgages. As one of the largest players in the field, Starwood Property trust focuses on making large loans with specialized terms. This gives them a competitive advantage over banks and smaller commercial finance REITs.

In 2013 acquired what is now the largest commercial mortgage servicing firm. That arm of the business handles servicing, foreclosure workouts (for fees) and the packaging of smaller commercial mortgages into mortgage backed securities.

Over the last few years, Starwood has acquired selected real properties, including apartments, regular office buildings, and medical office campuses.

For the 2019 first quarter, Starwood reported core earnings of $0.28 per share. This was not as bad as it looked since the earnings included the effect of a non-cash write down on the Regional Mall Portfolio equaling $0.24 per share.

Adding back the write-down and we have adjusted core earnings of $0.52 per share. Core earnings for the previous four quarters ranged from $0.53 to $0.58 per share.

The commercial mortgage business varies from quarter to quarter as significant amounts of outstanding loans get paid off and new loans are funded. Core earnings over the last two years have averaged right around $0.55 per share, handily covering the dividend.

The REIT has paid a $0.48 per share quarterly dividend since the 2014 first quarter. The stock yields about 8.3% at the current share price.

I view the dividend as one of the most secure in the high-yield stock space. The REIT is managed by Starwood Capital, a real estate focused private equity company with over $50 billion of assets under management.

Starwood Capital is a 2,200 person global organization, and Starwood Property Trust taps into that reach and expertise to find high value commercial mortgage prospects and other investments.

Billionaire Barry Sternlicht, as CEO of both Starwood Capital and Starwood Property Trust has often repeated his commitment to building the REIT with the goal of sustaining the dividend. Sternlicht and the upper management team own over $100 million of the shares.

Over the balance of 2019 the company has indicated that it will cash in on some of the commercial properties it acquired several years ago when values were much lower.

For example, Starwood has announced plans to sell office buildings in Ireland that were purchased the portfolio in 2015 as Ireland was recovering from the worst property crash in western Europe after the global financial crisis.

With a stock like Starwood, I recommend it to earn the 8% dividend yield long term. I don’t forecast any events that could stop that from happening. Even if the stock just earns the dividends for the rest of the year, it will be a great year for this stock, with a full year total return greater than 25%.

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