Starwood Property Trust Inc. Buy Thesis
I have owned Starwood Property Trust, Inc. (NYSE:STWD) in my personal portfolio for years. I am a huge fan of Chairman Barry Sternlicht. Barry is extremely well versed in real estate and a very smart guy. Below is a short excerpt on how Barry got started from Wikipedia:
"After graduation, he went to work for JMB Realty, a real estate investment company in Chicago. In 1989, at the start of the savings and loan crisis and the early 1990s recession, he was laid off.[18]
In 1991, at the age of 31, with Bob Faith, Sternlicht launched Starwood Capital Group to buy apartment buildings that were being sold by the Resolution Trust Corporation, created by the federal government to hold and liquidate the real estate assets owned by failed banks after the savings and loan crisis.[2] Sternlicht raised $20 million from the families of William Bernard Ziff Jr. and Carter Burden of New York to fund these purchases."
Barry often appears on CNBC's Squawk Box, giving his take on current real estate market conditions. He has been through it all. I have tremendous faith he can steer the ship through troubled waters, so to speak.
What's more, I expect Sternlicht to use the mREIT's (mortgage real estate investment trust) vast liquidity to seize on any potential opportunities that may arise in the coming months and years. Plus, I have complete faith in Barry's dedication to paying the dividend. Come hell or high water, Barry will ensure the dividend gets paid, he said so himself. The recent selloff due to the earnings miss has caused the dividend yield to spike to 11.25%. This has created an excellent income investing buying opportunity. Let's take a deeper dive into how things shook out last quarter, shall we?
Seeking Alpha Earnings Summary
Starwood missed on the top and bottom lines last quarter.
Nonetheless, Chairman and CEO Barry Sternlicht reassured investors regarding last quarter's earnings by stating:
"Our business model has continued to evolve since our inception in 2009. We have built a diversified enterprise on both sides of the balance sheet that would perform well in normal markets and outperform in volatile ones. This model is supported by one of the lowest leverage ratios in our sector at 2.5x and $1.5 billion of unrealized gains in our owned property portfolio, giving us tremendous flexibility. We are extremely proud of how the Company has performed throughout cycles since inception. Since that time, we have diversified our business model with more than 40% of our distributable earnings coming from sources other than commercial lending."
Starwood is presently down 16% for the quarter. Even so, the stock has been consolidating at current levels for a few months now.
Starwood Current Chart
Even though the mREIT missed earnings estimates last quarter, there are several positive factors that bolster the fact the company is well-positioned to thrive under just about any market environment.
Starwood Highlights
The company has 7 business units Barry refers to as "cylinders." These 7 cylinders give Starwood's management substantial flexibility in regards to deployment of capital. They deploy capital in the areas they see as most favored by the current macro environment. Starwood has a strong balance sheet, the assets are correlated to rising interest rates, and $8.4 billion in liquidity on hand. Barry's team is well-positioned to take advantage of any potential opportunities that may arise in the coming months.
Q1 2023 Highlights
Last quarter, the company had a slight miss on both EPS and revenues. There have been 3 downward revisions for the upcoming quarter according to Seeking Alpha.
Seeking Alpha Next Quarter Earnings Expectations
I like this. The lower the expectations the better. The big positive is Starwood's massive $8.4 billion in liquidity.
Starwood Financial Capacity
With $8.4 billion in dry powder Barry says he is ready to take advantage of any upcoming opportunities the market presents. Barry stated on a previous earnings conference call:
"We’re going to be very careful where we deploy the capital. It is – the market opportunity for us is as good as it’s been since we IPO-ed the company in 2009. Not only the banks pulling back on credit given the craziness of the Fed, nobody knows what to do. So the banks are not only not lending, but they’re reluctant to do anything, frankly. That creates unbelievable opportunities for companies like us."
Another plus is the fact some of Starwood's investment are positively correlated to rising rates.
Starwood's Commercial and Infrastructure Assets
Starwood's Commercial & Infrastructure lending portfolios have 99 and 97% floating rates respectively. The rise in interest rates has been a boon for Annual Net interest income. In fact, when reviewing Starwood's overall capitalization, the credit metrics look solid.
Starwood's Capitalization Overview
The mREIT's coverage ratios, unencumbered assets, and adjusted debt-to-equity ratios all appear reasonable. In fact, all three ratings agencies have Starwood's outlook as stable.
Rating Agency Credit Scores
Now let's turn our attention to the most important piece of the puzzle, the dividend.
Starwood's Dividend
With $8 billion in liquidity, Barry has unequivocally stated the dividend payout is safe. Barry stated on a recent conference call (emphasis added):
"I think it’s a fascinating time. The company is in really good shape. The team is focused and dedicated. We’re running all kinds of scenarios and plan As, Bs, Cs, Ds and Es. And we’d like to get back to investing as soon as we can and we have the ample liquidity to do it. So including also moving out assets that are not hitting ROE targets and returning that capital. Anything we get on those bad assets, we will quickly deploy into new opportunities that are abundant in front of us. So the distress in the market should be good for us. We have a liquidity to take advantage of it. We have the earnings power to get through the dividends until we see the end of world or the end of the cycle, the tightening cycle."
Seeking Alpha Dividend Summary
The dividend is current well covered by cash flow from operations. Moreover, the $8 billion in liquidity coupled with Barry's devotion to returning capital to shareholders helps me to sleep very well at night. These are the primary reasons I have placed Starwood into the SWAN income portfolio of my Seeking Alpha Income Investing Group Portfolio. Starwood has faithfully paid a dividend since its IPO in 2009.
Dividend History
With the stock trading 30% off its recent 52 week high, the opportunity to buy shares trading at a substantial discount to book value has presented itself. The stock is currently trading at a 17% discount to book value.
Starwood Book Value
Starwood is currently trading at a discount to book value.
The stock is down 30% and trading for 83% of the current book value per share. Historically, the mREIT trades at a 25% premium to book value based on the fact Barry is a superb operator. Now let's wrap this up.
The Wrap-Up
Barry Sternlicht's Starwood Property Trust, Inc. pays a very conservative and secure 11.25% yield dividend. I have complete faith in his ability to navigate the current macro environment. The company has a very low exposure to the office sector.
Starwood Total Assets
Sternlicht has successfully navigated the early 90s credit union crisis. What's more, he successfully navigated the 2009 credit crisis as well. The fact Barry not only survived, but thrived, when the real estate house of cards fell in 2008 ushering in the Great Recession exemplifies his prowess as a shrewd and very well-accomplished real estate expert. There is no better person I want watching over my investment than Barry Sternlicht at this time.
I see Starwood Property Trust, Inc. recovering from here and recapturing the $24 level within the next couple of years. As always, take your time and layer in to a new position over time to reduce risk. Thank you for your time and consideration in this matter. This article is for informational purposes only.
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