Starwood Property Trust (STWD)
From The Investor’s Edge
Starwood Property Trust (STWD) is the largest commercial REIT in the U.S. yet its price has been under pressure lately, which offers us a unique opportunity to own a great company at a great price.
Starwood Property sells for just above 10x earnings, a hair above book value, enjoyed a return on equity (ROE) of just under 13% in the last reported quarter, and sells at a stellar 7.4x operating cash flow.
While STWD has 61% of its assets in commercial mortgage lending, the other 39% is in small equity positions and servicing fees for other lenders. With cash flow numbers like these and the likelihood that, in Europe, rates will not go further negative but begin to come back above zero, I think increased cash flow from all segments will mean an increase in the dividend.
And because of Dodd-Frank induced “risk retention” rules, which force more firms to keep a portion of whatever they package as mortgage-backed securities, I see the number of competitors falling off over the next year or so. This puts Starwood Property Trust in the catbird seat.
Another thing in Starwood’s favor is that more originators will look outside for loan servicing. I just came across a company release that says they were the special servicer on more deals than anyone else in the year 2015.
This looks like a nice cash flow generator for years to come.
Joseph L. Shaefer, The Investor’s Edge, www.investorsedge.us, 800-253- 2088, May 2016
