Mortgage real estate investment trusts, or REITs, are popular investment choices among income-seeking investors because of their high dividend yields. Starwood Property Trust (NYSE: STWD) is one of the largest mortgage REITs in the industry, but it isn't like most of its peers. In this article, we'll take a look at Starwood Property Trust's business, what makes it different from its peers, and how it has performed for investors in over a decade on the public markets.
Starwood Property Trust company profile
Starwood Property Trust is a real estate investment trust, or REIT, that primarily invests in mortgages and other financing instruments. The company was formed in 2009 to take advantage of opportunities in commercial lending created by traditional lenders exiting the space after the financial crisis and is affiliated with real estate investment firm Starwood Capital Group, which has been around since the early 1990s and has more than $70 billion in assets under management.
The company's primary business segment is commercial real estate lending, and the company also has investments in commercial mortgage-backed securities (CMBSs), non-agency residential mortgages, and infrastructure loans. The commercial lending business consists of primarily first mortgage loans, and most are at floating interest rates, which allows the company to make money in any interest rate environment. The majority of commercial mortgages in the portfolio have loan-to-value ratios below 50%, and it's a generally high-quality group of loans.
In addition, unlike most other mortgage REITs, Starwood Property Trust also has a substantial portfolio of real estate. Of the company's roughly $19 billion in assets, about $2.3 billion is invested in high-quality properties. In all, Starwood Property Trust owns 109 properties including more than 15,000 multifamily housing units and 3.8 million square feet of commercial space, with a particularly high concentration in medical offices.
This technically makes Starwood Property Trust a hybrid REIT, as it has some components of both mortgage and equity REITs in its portfolio, but it's important for investors to realize that the mortgage REIT side of the business is the larger of the two.
As of the end of 2020, commercial mortgage loans made up 60% of the portfolio, making it the largest component by far. In fact, Starwood Property Trust is the largest commercial mortgage REIT in the United States. The real estate portfolio made up 14%, and no other component accounted for more than 10% of the overall investment portfolio.
Part of Starwood Property Trust's strategy and competitive advantage is leveraging its relationship with Starwood Capital Group. For example, the latter has excellent relationships with major players in commercial real estate, such as Blackstone Group (NYSE: BX), Brookfield Asset Management (NYSE: BAM), and many others, all of whom are borrower clients of Starwood Property Trust.
Like most mortgage-focused REITs, Starwood Property Trust uses quite a bit of leverage, but not as much as many of its peers. While many mortgage REITs have leverage ratios of five-to-one or higher, Starwood's is 3.5-to-one. In a nutshell, commercial mortgages and non-agency residential loans come with generally higher yields than the agency-backed loans that many of the leading mortgage REITs invest in, so there's no need to use a huge amount of leverage to achieve strong returns. As of December 31, 2020, Starwood Property Trust had a total of $12 billion in debt obligations outstanding, with an additional $7 billion of available capacity on its credit facilities that it could use to add to its investment portfolio.
Starwood Property Trust news
The biggest news item to affect Starwood Property Trust recently is of course the COVID-19 pandemic, which, to put it mildly, was devastating to the mortgage REIT industry.
Here's the simplified version: When the pandemic hit, there were widespread fears of loan defaults and the value of mortgage loans and related assets plunged. Since mortgage REITs (including Starwood) use considerable leverage, this caused the value of their investment portfolios to decline rapidly, which often triggered margin calls from lenders.
Starwood wasn't quite as affected as most of its peers thanks to its below-average leverage ratio and the fact that it isn't just a mortgage REIT (it owns physical properties as well). The company's strong balance sheet allowed it to get through the worst of the pandemic without massive asset sales at fire-sale prices like some of its peers had to deal with. In fact, a quick look at the charts shows that out of a group of leading mortgage REIT peers that includes Annaly Capital Management (NYSE: NLY), Two Harbors (NYSE: TWO), AGNC Investment Corp (NASDAQ: AGNC), and PennyMac Mortgage Investment Trust (NYSE: PMT), Starwood Property Trust is the only one trading higher than it was at the start of 2020.
What's more, Starwood was one of the only mortgage REITs that was able to make it through 2020 without cutting its dividend, making its quarterly $0.48 per share payments throughout the year. Shortly after the onset of the pandemic, CEO Barry Sternlicht sent a letter to shareholders ensuring them that their dividend would be paid as scheduled and there were no major liquidity concerns.
In fact, Starwood's management aimed to capitalize on its position of strength, saying in its first-quarter 2020 earnings release that the company "is well-positioned to take advantage of dislocations in the market and to weather this economic storm with immense human and financial resources." The company stayed profitable throughout 2020 and ended up getting quite aggressive with new investments in the second half of the year, deploying $1.5 billion in capital in the third quarter alone.
Starwood Property Trust stock price
As mentioned earlier, Starwood Property Trust was formed in 2009, making it one of the older mortgage REITs in the market, so we have quite a bit of performance history to look at.
In roughly 12 years as a publicly traded company, Starwood Property Trust's stock price has risen by 58% as of mid-April 2021, but that doesn't tell the full story. Like most mortgage REITs, price appreciation is a secondary goal for the company -- the primary objective is to generate income for its investors. As of this writing, Starwood Property Trust pays a 7.5% dividend yield, and the company has paid a substantial dividend throughout its history.
The point is that REITs are generally best judged by their total returns, and that's especially true for mortgage REITs. With that in mind, here's how Starwood Property Trust has performed over certain time intervals, compared with the S&P 500: