marchmeena29 Starwood Property Trust, Inc. (NYSE:STWD) managed to cover its $0.48 per share per quarter dividend with distributable earnings in the first quarter and the commercial real estate investment trust saw strong origination activity as well. With momentum in investment fundings spilling over into 2024 and with the portfolio overall performing well, I think that the commercial mortgage trust remains a very compelling investment option for passive income investors this year. The 10% yield, taking into account Starwood Property Trust’s pay-out ratio of just about 81%, should be safe in 2024. My Rating History Starwood Property Trust maintained a high margin of safety in 1Q24 and the dividend does not seem to be threatened as dividend pay-out metrics look quite solid. Furthermore, given the quality of Starwood Property Trust’s 10% yield, I think that the valuation multiple is particularly compelling. Portfolio Trends, Earnings Growth And Reserve Trend Starwood Property Trust remained a well-diversified commercial real estate investment trust at the end of the first quarter, with a combined portfolio value of $26.1 billion. The trust’s percentage of loans handed out to the U.S. office sector did change slightly in the first quarter, from 10% to 11%, but the portfolio overall remained well-diversified with the majority of investments (58%) being commercial loans. Starwood Property Trust’s portfolio included other investments as well, including residential loans, Medical Office Buildings and commercial real estate securities. Total Assets (Starwood Property Trust) Commercial real estate loans were the biggest income-producing segment within Starwood Property Trust’s portfolio. The trust earned a total of $191.6 million in distributable earnings in the first quarter, reflecting 1% growth QoQ. Starwood Property Trust earned $0.59 per share, reflecting $0.01 per share growth QoQ, thanks to a strong showing of the Lending segment. Reconciliation Of Net Income To Distributable Earnings (Starwood Property Trust) The commercial lending portfolio is also well-performing, which is an important distinction compared to other mortgage trusts, some of which recently reported a significant deterioration in the dividend coverage metrics due to negative credit loss reserve trends (which I will discuss below). The commercial lending portfolio was 96.3% performing and, combined with very solid dividend coverage, I think passive income investors don’t have to worry about the sustainability of the dividend in 2024 at all. Commercial Lending Metrics (Starwood Property Trust) Stable Dividend Coverage With A High Margin Of Safety Starwood Property Trust earned $0.59 per share in distributable earnings in 1Q24 which, under consideration of a stable $0.48 per share per quarter dividend pay-out, equates to a dividend pay-out ratio of 81% (123% dividend coverage). Compared to the prior quarter, Starwood Property Trust’s dividend coverage ratio improved by a small amount (1.4 percentage points), but the dividend as such remained well-covered by distributable earnings. In the last twelve months, Starwood Property Trust paid out 94% of its earnings, which suggests that the commercial mortgage trust can sustain its dividend in 2024. Dividend (Author Created Table Using Company Supplements) Small Premium To Book Value Due to the diversified business of Starwood Property Trust, STWD is selling at a premium to book value, which contrasts with Blackstone Mortgage Trust, Inc. (BXMT) or Apollo Commercial Real Estate Finance, Inc. (ARI). Blackstone Mortgage Trust, for instance, recently suffered a decline in its dividend metrics due to a higher number of impaired loans that lowered the trust’s dividend coverage ratio to just 105%. Apollo Commercial Real Estate Finance had a dividend coverage ratio of 100% in Q1’24 which completely caused its dividend safety margin to disappear. Starwood Property Trust is selling for a 1% premium to book value (the trust’s GAAP book value as of March 31, 2024 was $19.85). This book value reflects what I consider to be intrinsic value. Both Blackstone Mortgage Trust and Apollo Commercial Real Estate Finance traded at higher discounts to book value (see below), primarily because of their weaker dividend coverage metrics. Data by YCharts Why The Investment Thesis Might Be Faulty Blackstone Mortgage Trust in particular saw a very negative credit loss reserve trend in the first quarter, which has weighed on the company’s dividend coverage and reduced the company’s margin of dividend safety. Starwood Property Trust’s portfolio is well-performing and the dividend coverage ratio looks robust. A change in this trend, however, would be a major red flag for me. Specifically, a drop of the dividend pay-out ratio below 110% would make a dividend cut much more probable and potentially threaten the trust’s long dividend track record. My Conclusion Starwood Property Trust once again reaffirmed my high opinion of the commercial mortgage real estate investment trust with its first quarter earnings. The trust comfortably covered its dividend with distributable earnings, profited from an ongoing rebound in new investment fundings and Starwood Property Trust’s investments continued to perform rather well. The high degree of excess dividend coverage, which translates into a high margin of safety, is the primary reason why passive income investors should consider buying into STWD for recurring income. That the trust’s stock is also available at a small premium to book value only helps make Starwood Property Trust more compelling as a passive income investment as well.
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Starwood Property Trust: Safe 10% Yield For Passive Income Investors (NYSE:STWD)
