Starwood Property Trust Stock: Get a Safe 8% Yield (NYSE: STWD)
Starwood Property Trust Inc. (NYSE: STWD) pays a constant dividend yield of 8% which is entirely covered by the distributable profits of the trust. The trust is focused on commercial lending and has built a reputation for earning and paying dividends on time over the past decade.
Starwood Property Trust should be in everyone’s portfolio due to its well-covered dividend and track record of paying out a consistent distribution over time.
Diversified investment portfolio
Starwood Property Trust is a leading diversified financial company with a primary focus on commercial lending and real estate investments. The trust has been in operation for over a decade and has delivered consistent results since its inception in 2009.
Initially, the REIT focused on commercial lending projects for which the Trust took out mortgages. In recent years, Starwood Property Trust’s operational focus has broadened, with the trust expanding into areas such as infrastructure lending and mortgage servicing.
About 63% of the trust’s assets are invested in commercial loans, with the rest spread across segments such as infrastructure loans, residential loans and real estate investments. Commercial lending activities generate 44% of the trust’s distributable profits, followed by investments and real estate services.
Starwood Property Trust’s primary assets are in the commercial lending business, which, as previously noted, is the trust’s largest asset in terms of earnings contribution. The Trust’s commercial lending activities consist primarily of first mortgage loans, which represent 91% of the Trust’s commercial lending assets.
These mortgages are mostly (98%) variable rate, with the majority (81%) having a loan to value ratio of 0-50%. Loan-to-value ratios below 50% are generally considered very high quality and have a low risk of default.
The higher the loan-to-value ratio, the higher the risk associated with the underlying mortgages. Starwood Property Trust’s commercial loan portfolio is worth $14.2 billion and is by far the largest segment of the trust’s growing real estate portfolio.
Starwood Property Trust operates other real estate-related segments in addition to a commercial mortgage segment. On a book basis, the real estate portfolio is worth $1.96 billion in medical offices and other real estate.
The real estate assets of the trust are important because rental income generates a significant part of the distributable profit. Starwood Property Trust’s real estate investments generated $0.87 per share of distributable earnings in 2021, representing a 33% share of the trust’s earnings.
The commercial and residential loans segment generated the majority of distributable earnings, $1.80 per share, representing 68% of the trust’s earnings. The rest is split between REIS (19%) and infrastructure loans (5%).
Starwood Property Trust’s distributable income of $2.63 per share in 2021 was more than enough to pay investors the $0.48 per share quarterly dividend the trust has maintained for years. In 2021, the trust had a payout ratio of 73% when all dividend payments to investors were totaled (based on a total annual dividend payment of $1.92 per share).
Starwood Property Trust does not pay special dividends, although it is able to do so. The consistency of the trust’s dividend payments speaks volumes about an investment in Starwood Property Trust. Since 2014, the trust has paid a quarterly dividend of $0.48 per share, making Starwood Property Trust one of the most consistent dividend payers for investors.
I don’t think management will increase the dividend in the near future, so investors shouldn’t expect it to increase. That said, an 8% yield from STWD is quite respectable, and given that the dividend is well hedged, the stock is very attractive to dividend investors.
A low price to pay for Starwood Property Trust
Starwood Property Trust’s large real estate portfolio is valued at 1.18 times book value, implying that investors are paying only a modest 18% premium on the total book value of its assets. The stock has a 9.0x multiple based on distributable earnings, an important metric for Starwood Property Trust. Given the security of Starwood Property Trust’s dividend for most of the past decade, I think that multiple of distributable earnings makes the stock cheap.
What could drive the stock down?
Starwood Property Trust would be vulnerable to a downturn in the U.S. housing market, which may or may not lead to lower demand for mortgages. Since Starwood Property Trust has excellent dividend coverage, I would be comfortable holding STWD in a downturn.
Starwood Property Trust is a well-managed commercial real estate investment trust with growing lines of business and strong commercial lending activity.
Starwood Property Trust stock is a good buy due to its well-covered dividend, exposure to floating interest rates and 8% yield. The valuation based on distributable profit and book value also contributes to the low share price.