This mREIT Gets Even Better
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Starwood Property Trust (NYSE: STWD) operates as one of the largest commercial mortgage REITs, both buying existing commercial mortgages and originating its own commercial loans. It’s been over three years since the company commenced operations, and since then Starwood has carved out a dominant position in the REITs sector for itself, providing attractive dividend yields and potential for growth. The $3.4 billion market cap company was initially built to take advantage of a multi-trillion dollar commercial lending market where many of the players have restricted their commercial real estate lending.
Recent Performance
During the third quarter of 2012, the company invested $599 million in originations and acquisitions of new investments, bringing the total gross capital deployed since inception to $5.7 billion. As of November, the company had around $400 million of loans and investments in various stages of due diligence that are expected to be closed during the fourth quarter of 2012. The company is expected to disclose the performance of its fourth quarter on Feb. 24.
During the third quarter of the prior year, Starwood reported a bottom line of $0.43 per share, around 170% above the bottom line of the same quarter of the previous year. In comparison, PennyMac Mortgage (NYSE: PMT), which invests and originates residential mortgages, reported an 11% surge in its bottom line. Starwood reported net interest margin of $60.8 million, up 20% from a year ago, while PennyMac’s comparable net investment income surged 137% over the same time period. For Starwood, the increase in net interest margin was a result of 168% improvement in interest income from mortgage backed securities and an 8% improvement in interest income from loans, partially offset by a 65% rise in interest expense.
In contrast, CreXus Investment (NYSE: CXS), which is another commercial mortgage REIT with a market cap of $23 billion, reported a 44% decline in its bottom line, while the net interest margin declined 40% from a year ago.
How Starwood Becomes Better
The company announced on Jan. 24 the acquisition of LNR Property LCC for $1.05 billion cash. LNR Property has several commercial real estate related businesses. It stands to be the largest special servicer of distressed commercial property debt, owning a loan portfolio of $130 billion. Along with owning large amounts of commercial MBS and CDOs, the company also originates commercial mortgage loans and securitizes them into CMBS. It has established its commercial mortgage servicing business in Europe and owns a 50% share in Auction.com.
Besides providing Starwood with a different geographical exposure, LNR would provide it with other business diversifications. LNR’s special servicer and mortgage origination business, which each account for a third of the value of LNR, are complimentary businesses to the commercial real estate business cycle. If one is not performing well, the company can rely on the other one. Another benefit of this acquisition to Starwood is that LNR owns a valuable database on the US commercial property market. This data will provide Starwood opportunities to grow further.
Annaly Capital Management (NYSE: NLY) is in negotiations to buy CreXus Investments, a commercial mortgage REIT to diversify its business model in the prevailing ultra low interest rate environment. I believe as long as the Fed is committed to keep the rates low, such acquisitions and diversifications are the only way out for residential mortgage RIETs like American Capital Agency (NASDAQ: AGNC), Armour Residential and Annaly Capital Management.
Dividends
The stock currently offers a dividend yield of 7%, in comparison to 10.2% and 8.4% being offered by CreXus Investments and PennyMac Mortgage Investment. In contrast, the residential mortgage RIETs, like Annaly, American Capital and Armour are offering 12%, 16% and 13.7%, respectively.
Conclusion
Starwood has become a major player in the $50 million and up commercial mortgages. The acquisition of LNR would allow Starwood to expand its offerings into the smaller loan market. It will also expose the company to a different geographical position, besides providing the Starwood with valuable data and knowledge of the US commercial mortgage market.
I further believe in such challenging macroeconomic environment, diversification and acquisitions are the way out for most of the residential mortgage REITs.
equityfinancials has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
