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By GARRETT BALDWIN, Behavioral Trading Specialist, Money Morning • July 14, 2020
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Dear Red Alert Reader,
Commercial real estate lenders have seen their stocks hammered so far this year. REITs that lend for commercial real estate investing have also been hit very hard as the pandemic continues causing havoc across the country.
Even those CRE Lenders considered to be best in class Commercial Mortgage REITs have seen this stock fall by 40% or more since the pandemic began.
Increasingly, it looks like we have a baby with the bathwater situation. Many REITs, including commercial mortgage REITs, were heavily owned by exchange-traded funds that mimicked various REIT indexes.
When panic-struck retail investors began running for their lives, everything got sold regardless of fundamentals, management skill, or loan portfolio quality.
But our top REIT just flashed a strong signal indicating it's a buy now…
Buy This REIT Now
Starwood Property Trust Inc. (NYSE: STWD) is one of the best run commercial real estate REITs available today. It is also one of the least understood. The fact that the stock is off by more than 40% this year offers investors a unique opportunity to collect a double-digit dividend yield and potentially double their original investment.
Starwood is associated with Starwood Capital, the firm founded by now-legendary real estate investor and lender Barry Sternlicht. Under Sternlicht's leadership, since being established in 1991, Starwood has raised approximately $45 billion of equity capital and currently has more than $60 billion of assets under management.
Over the past 28 years, Starwood Capital has acquired over $110 billion of assets, including properties within virtually every major real estate asset class. Starwood Properties is its last remaining publicly traded asset.
The relationship with Starwood Capital gives Starwood Property Trust a unique information advantage insight into over $100 billion of real estate transactions every year. It can also take advantage of Sternlicht and Starwood Capitals' decades-long relationships with sponsors, institutional borrowers, banks, and brokers in the CRE community.
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Despite the coronavirus madness in commercial real estate markets, the Starwood Property portfolio is in decent shape. The average loan to value on the 109 properties in the loan portfolio is just 61%, so declines would have to be massive before Starwood would be at risk of losing capital.
Eighty-eight percent of the loans are first mortgage loans, so Starwood gets paid first if something goes wrong. More than 90% of the loan portfolio is floating rate, so we are protected in the unlikely event rates go higher anytime soon.
Looking at Infrastructure
There is more to Starwood Property Trust than commercial real estate. And that's good news after Democratic Presidential candidate Joe Biden announced plans for a massive infrastructure program should he win the 2020 election.
You see, Starwood has also developed an infrastructure lending portfolio that finances long-lived infrastructure assets.
The team running this portfolio has expertise in the global thermal and renewable power and downstream, midstream, and upstream oil & gas sectors. They are all veterans who have contacts in the independent power producers, private equity firms, and financial institutions that give them an edge in sourcing and underwriting deals.
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Starwood Property Trust also owns a portfolio of real estate properties made up of medical office properties multifamily housing properties. This portfolio is 98% occupied as of the end of March and encompasses over 15,000 residential units. The multifamily portfolio has an average renter FICO score of 730, so I do not anticipate rent collection becoming a problem for this REIT.
Executive Level Moves
Starwood's management is working on rewarding and protecting shareholders. In addition to the double-digit dividend yield during the quarter, the board approved a $400 million repurchase program and has repurchased 1.9 million shares of common stock with a weighted average repurchase price of $14.95 per share for a total cost of $29 million. The quarter's management fee was paid in stock rather than cash to help shore up the balance sheet.
Starwood's president, Jeffrey F. DiModica, pointed out on a recent conference call that Starwood had seen no severe problems in its loan book and is financially strong enough to avoid forced sales to raise cash or meet margin calls. This puts Starwood in a great position to go on offense to invest in loans that are mispriced due to the liquidity crisis in the capital markets.
Starwood Property's Real Estate Investment and Servicing (REIS) is a unique position to exploit difficult CRE markets. REIS supports its investing activities with the world's preeminent special servicing platform, LNR Partners, LLC.
LNR is the world's largest commercial mortgage special servicer by an active balance in special servicing. It has resolved over 6,500 non-performing assets with a total principal balance of over $73.2 billion across all major property types.
Starwood is the best-in-class commercial real estate lender with several other operations that can help it protect its portfolio and boost profits. The recovery potential is enormous, and at today's price, the yield is almost 14%.
Add that to a doubling of the stock within the next 18 months, and you're looking at a 114% total return.
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