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Home / Business / 2 growth catalysts mean this 9% blue chip could be a good buy today – Starwood Property Trust, Inc. (NYSE: STWD)

2 growth catalysts mean this 9% blue chip could be a good buy today – Starwood Property Trust, Inc. (NYSE: STWD)





(Source: imgflip )

My portfolio for dividend growth is mainly based on low to medium risk dividend stocks. This means that due to the volatility of their dividends across economic cycles, I largely steer clear of high-risk industries such as MREITs and BDCs.

However, that does not mean that I do not see a few first-rate names. I think they have the potential to prove to be a source of generous, safe, and even growing dividends over time. In fact, I actually have a mREIT and have several more on my watch list.

One of them is the Starwood Property Trust (STWD), the largest commercial mREIT in America. Let's take a closer look at why this industry-leading blue chip may have the potential to become one of the few sleep-night systems or SWANs in this otherwise risky industry.

More important, why? As long as the economy remains strong, Starwood could increase its profits and not only reward patient investors with one of the safest returns in the industry, but also with a growing one.

Starwood Property Trust: Industry Leading Management Team Relies on All Cylinders

Starwood Property IPOd in 2009 and is an externally managed hybrid commercial mREIT of the Starwood Capital Group.



(Source: Starwood Property Trust Investor Presentation )

Starwood Property is the largest commercial mREIT in the US by market capitalization and benefits from Starwood Capital's global reach and deep industry connections. For example, Starwood maintains 11 offices on three continents and has access to an annual potential deal flow of over $ 100 billion.

Over the past 26 years, CEO Barry Sternlicht, who co-founded Starwood Capital in 1991 (and also CEO of Starwood Property Trust), has demonstrated his proven ability to invest conservatively but profitably across multiple real estate businesses. to generate assets under management of $ 56 billion. Note that the average executive in the C-Suite has 31 years of experience in the commercial real estate lending industry.



(Source: Investor Presentation by Starwood Property Trust)

These include primary commercial mortgage loans that they use to invest in securitized non-agency residential real estate or RBMS (ie average FICO 726) non-dangerous CDOs) that securitise commercial mortgages and most recently own and manage rental properties.



(Source: Investor Presentation by Starwood Property Trust)

In 2017, the vast majority of mREIT's assets and core earnings related to the lending and servicing business. And thanks to Starwood Capital's very large deal flow ($ 9.5 billion in the last 16 months), Starwood has been able to achieve very strong growth in both the upper and lower ranges.

Metric

Q1 2018 Results

Sales growth

31.1%

Core profit growth

18.2%

Stocks outperforming growth

4.0%

EPS Core Growth

13.7%

Dividend Growth [19659022] 0%

Dividend Payout Ratio

82.7%

(Source: Profit Release)

Included a double-digit core EPS, which finances the dividend. Although this dividend has not risen since 2014, the payout ratio has fallen to industry-leading levels. This creates a strong safety buffer and increases the chances that we will soon see a modest dividend increase driven by continued strong earnings growth.

Note that Starwood provided $ 2.5 billion of capital by May 4, . including $ 2 billion in the first quarter of 2018. Most of it was on the credit side of the business.



(Source: Starwood Wage Supplement)

Now, strong asset growth alone does not make good mREIT. Rather, management must be able to manage its risks well. Fortunately, Starwood has a great track record, including the fact that since its IPO, there has never been a credit default on $ 26 billion in lending. Admittedly, the main reason is to make these loans in a recovering economy. However, there are two factors that investors can rely on when they see management believe in disciplined and conservative underwriting.

First, it primarily makes first-rate mortgage credit. This means that it comes first in the capital stack to repay. Next, note the 63% Loan Value Ratio or LTV. This shows us what size most customers pay for these mortgages. In this case, about 37% on his recent lending.



(Source: Starwood Income Supplement)

More importantly, the lending rate on all their loans has remained low and stable over time. The reason why this is important is that the primary way that management protects against a defaulting customer is to be able to repossess and then sell the property. With a low LTV (76% of the loans are LTV 50% or below), this is equivalent to holding the real estate that was built with these credit dollars as collateral, but at 62 cents a dollar. This means that in the worst case (total default), Starwood's first mortgages can be closed and expensive loan losses can be avoided. Losses that can reduce earnings per share and jeopardize the dividend.

Starwood continues to diversify risk by diversifying its loans across multiple regions, industries and even abroad.

(Source: Investor Presentation by Starwood Property Trust)

Another thing Starwood does is securitize or sell portions of its mortgage loan to third parties such as hedge funds, pension funds or insurance companies. As a rule, it retains 25% of the loan for such transactions, which aim for an annual interest rate of 11%.

In the first quarter of 2018, management estimates that its $ 1.2 billion in commercial mortgage lending generates 12.3% IRRs. This is due to the use of leverage, typically around 3X, and the fact that almost all commercial loans are floating rate (100% in the first quarter of 2018, 93% overall).



(Source: Investor Presentation by Starwood Property Trust)

For variable rate loans, the interest rate is linked to the global commercial credit standard LIBOR. LIBOR rose rapidly (1.18%) last year and global interest rates are expected to continue to rise, albeit not so fast.



(Source: Investor Presentation by Starwood Property Trust)

Thanks to this exposure to floating rate loans, management estimates that an increase in LIBOR by 100 basis points would result in a 3% increase in core EPS on existing loans. The higher LIBOR climbs the more profitable the older its credit portfolio is, and LIBOR rises 3% to 11% of core EPS.

But what really inspires me about Starwood's growth strategy is how it is now diversifying ownership of commercial real estate.





(Source: Starwood Income Supplement )

Starwood has invested $ 3.5 billion ($ 3 billion, including depreciation) in commercial rental properties (27% of assets) and now owns 113 including 10,733 apartments. In the first quarter of 2018, the property portfolio had an average occupancy rate of 98%, contributing $ 0.10 per share to core EPS and 17% to mREIT, respectively. This real estate portfolio generates 10.9% cash yields, suggesting that the management does good business, provided that it controls its risks and also in the lending business.

This business is not as profitable as its credit and service businesses. However, these rental properties will not disappear within a few years but will provide reliable cash flows for many years and sometimes decades, both from the US and Europe.

(Source: Starwood Property Trust 10-K)

Management sees good short-term growth prospects for the future, with second-quarter earnings in 2018 likely to recover relatively favorable capital.



(Source: Starwood Income Replacement)

Overall, the mREIT has $ 4.25 billion of remaining borrowing, which together with its $ 286 million in cash, has total liquidity of over $ 4.5 billion Dollar yields. However, management has said that it is only willing to borrow $ 2.6 billion of this capacity to avoid a dangerous overvaluation of its balance sheet.

This means that Starwood has $ 2.9 billion in effective liquidity and that mREIT continues to enjoy low-cost capital in the junk bond market. For example, in the first quarter of 2018, fixed-rate bonds of $ 500 million were sold for 3.625%, which they exchanged for variable interest rates (Libor + 1.28%).

According to Starwood President Jeffrey DiModica, this was "the tightest spread for a high-issuance of bonds since the financial crisis and more in line with trading investment-grade names." This means the bond market's confidence in lending Starwood grows thanks to a strong economy and good implementation. This gives him a competitive advantage (lower lending rates) than his smaller competitors.

In addition, despite high levels of capital overflow (more so in the risk sector), management has found that the profitability of its loans is rising, not down. In the first quarter of 2018, maturing loans had IRRs that were 0.9% below those replaced by the mREIT.

Overall, Starwood Property has several competitive advantages over its competitors, including one of the industry's most experienced management teams, conservative and disciplined underwriting standards (lower risk of default) and a rapidly growing real estate portfolio that should result in significantly less volatile profits in the future ,

This may mean that Starwood Property could be one of the lowest risk mREITs, as one of the most capable of proving to be capable of generous, secure and growing dividends over time.

Dividend profile: Secure dividend (for now) and market potential, if it can persist over time

mREIT

Yield

Payout

Predicted dividend growth

10 years potential annual total return

Starwood Property Trust

9.00%

82.7%

2.5% to 5% [19659022] 11.5% to 14% [19659023] S & P 500

1.90%

32%

6.20%

8.10%

(Sources: Earnings Release, FASTGraphs, Gurufocus, Multpl, CSImarketing) [19659062] The most important aspect of any income investment for me is its payoff profile consists of three parts: return, dividend security and long-term growth prospects.

Starwood, like most mREITs, has a tasty return that attracts first-income investors. The Achilles heel of the industry, however, are very high payout ratios, which offer little security for the dividend. Most commercial mREITs have payout ratios of 90% to 100%, while mREITs typically have payout ratios of 95% to 105%.

By comparison, Starwood's payout ratio of 82.7% in the first quarter of 2018 is among the lowest in the industry's dividend sector, one of the safest (for now). But there is more to it than just a good dividend payout ratio. There is also a record that should be considered.

The mREIT business model has great leverage, but commercial MREITs have lower debt ratios than MREITs for residential real estate. This is because the profitability of their loans is higher and thus lower leverage is needed to achieve double-digit IRRs.

mREIT

Debt / Capital

Interest coverage

S & P Credit

STWD

62%

2.7

BB (stable outlook)

Industry average [19659020] 69%

1.9

Junk

(Source: Result Supplement, NAREIT, FASTGraphs) [19659098] The balance sheet of Starwood is better than that of most commercial mREIT companies with lower debt versus capital and higher interest coverage , However, keep in mind that despite this and its industry-leading scale, it still has a junk bond credit rating. This is not surprising as almost all mREITs have sub-investment grade ratings. This is due to the highly cyclical nature of their returns and the short- to medium-term nature of their assets (loans are being reduced over time).



[Source: Investor Presentation by Starwood Property]

But while Starwood's balance sheet is stronger than Most, I'll keep an eye on the debt levels that have risen over time. Management has said it will focus more on unsecured debt in the future, which could mean higher borrowing costs in an environment of rising interest rates.

Regarding the dividend growth outlook, MREITs are known for yield rather than payout growth. However, in good economic conditions, commercial mREITs can achieve a small payout over time. In the case of Starwood, analysts expect long-term EPS growth of 5%. If the mREIT can actually do that then the tax requirements will cause the Starwood dividend to grow at a similar rate over time.

However, note that 5% growth is a best-case scenario that would require the economy to remain robust for the next decade. This would also mean that Starwood continues to aggressively expand its commercial real estate portfolio to achieve a much more stable cash flow, resulting in a safer dividend and thus much higher multiples. That's because Starwood wants to maximize its growth rate and become competitive in the crowded equity REIT sector.

Overall, I take a more conservative stance on Starwood's dividend growth and estimate 2.5% long-term dividend growth (assuming it can avoid a cut during the next recession). However, given the very high current yield, I would be pleased with a profit growth of only 1%. This would probably lead to long-term total returns of 10%, which is equivalent to my hurdle rate. It is also likely to be larger than the historic 9.1% return on the market or the 8.1% that the S & P 500 will generate from its current valuation over the next 10 years.

Rating: slightly undervalued and correct in the Sweet Spot [19659105] Chart "width =" 624 "height =" 360 "data-width =" 635 "data-height =" 366 "data-og-image-twitter_small_card =" true "data-og-image-twitter_large_card =" true "data-og-image-twitter_image_post =" true "data-og-image-msn =" true "data-og-image-facebook =" true "data-og- image-google_news = "true" data-og-image-google_plus = "true" data-og-image-linkdin = "true" />

STWD Total Return Price data for YCharts

Starwood did not have a good one However, this may potentially create a better buying opportunity for value-oriented high yield investors.

P / core EPS

Adjusted core EPS growth rate

Historical P / core EPS

price / Book value [19659020] Historical P / BV

Yield

Historical Yield

9.3

0.4%

11.1

1.21

1.1 [19659022] 9.00%

8.80%

(Sources (Gewinnveröffentlichungen, FASTGraphs, Gurufocus)

There are three ways to rate a stock (because no single metric is 100% objectively correct). The first is to determine if a company can achieve my total personal return (and possibly beat the market). As we have just seen, Starwood's current return is sufficient to beat the market and almost reach my hurdle rate for dividends alone.

The second option is to compare the relevant assessment metrics with their historical norms. Starwood's Core / EPS today is trading at a significant discount to its historical standard (since going public) and implies a long-term EPS growth rate of just 0.4%. This is not necessarily a crazy pessimistic scenario given the volatility of the MREIT returns, but I think Starwood could surpass those low expectations.

In terms of value for money, this is one of the most popular methods used by mREIT investors. While it's true that Starwood is trading at a premium to book, and beyond its historical norm, I think that's a good thing. Remember, mREITs often sell new shares for growth, which means that a price below book value means dilutive issues that reduce the book value over time (and increase the dividend cost that jeopardizes its safety).

Think so. Starwood trading with a slight premium to book is the market way of saying that it's worth $ 1.21 for $ 1 in Starwood assets to pay because management can use that money to make profitable investments and business (and hopefully the dividend) over time. By contrast, a mREIT for a P / BV of less than 1 means that management has proven to be a destroyer of shareholder value and the market demands a rebate to compensate for the higher risk.

Ultimately all the shares sold above are sold The book value is as effective as the management, which receives free money that it can invest on behalf of the shareholders. In this industry, this is a great competitive advantage that I want to achieve with every possible mREIT.

Finally, I compare the current yield with the historical yield. This is because the return on a stock over time is usually cyclical but on average declining. In other words, if the business model does not fall apart, the return fluctuates around a fixed point that represents the long-term fundamental growth of a company.



(Source: Simply Safe Dividends)

Another way to think about it is that the five-year average yield is a proxy for fair value. For an industry-leading blue chip like Starwood, with its numerous competitive advantages in terms of scale and management quality, I'm ok with fair value or better pay.

In this case, it seems that Starwood is about 5% undervalued, which shows my other two valuation methods. This means that while Starwood is not as cheap as it was during the correction, it is still a potentially good high yield investment. Assuming, of course, that you are familiar with the large and complex risk profile of the mREIT.

Risks to keep in mind

There are many risks associated with the mREIT industry that investors need to keep an eye on.

Importantly, as externally managed mREIT (all but Ladder Capital (NYSE: LADR)), Starwood is not run like a traditional stock REIT. In particular, internally managed REITs (like most equities REITs) have a management that works directly for shareholders. By contrast, externally managed REITs like Starwood are more like hedge funds because management is a third party that pays for itself.

In the case of Starwood, the base management fee is 1.5% of equity (total share issue plus accumulated profits)). There is also an incentive charge of 20% of earnings growth (not per share) above an annual hurdle rate of 8%. The biggest reason that many investors dislike externally managed REITs is that they can create a conflict of interest between management and shareholders.

This is because management compensation is not based on earnings per share (which is directly linked to dividend security and growth). This is a problem also seen in the BDC industry, where almost all BDCs are managed externally and companies are trying to grow for reasons of growth, but investors benefit little from this.

Total Administration Fees for 2015, 2016 and 2017 were: 19659140] 2015: $ 96.9 million or 13.2% of revenue

  • 2016: $ 93.8 million or 12.0% of revenue [19659135] 2017: $ 109.9 million, or 12.5% ​​of sales
  • Q1 2018: $ 30.6 million, or 11.8% of sales [19659144] Now, it should be noted that Starwood is better than most mREITs because his CEO is not only associated with his manager (Starwood Capital), but also with his co-founder and CEO. This means that the Starwood Property Trust is better monitored than many of its competitors. While management fees increase over time (25.7% compared to last year's growth in the first quarter of 2018) as a percentage of turnover, these management fees are declining over time, which is not the case for some of their competitors.

    The external management of Starwood, although suboptimal, has not been proven to be detrimental to shareholder value. But that could always change, especially if the management makes costly mistakes.

    And as my colleague Brad Thomas has explained, diversifying Starwood into direct ownership of commercial real estate carries its own risks. In particular, due to the sale / leaseback agreement with Cabela / Bass Pro Shop in 2017, Brad believes that Starwood is out of its jurisdiction and has downgraded the stock from a buy to a hold.

    Personally, I like it when mREITs become more diversified over time, especially when they get access to very long-term contracts that can smooth out their returns over time. But Brad is right that Starwood, at least in triple-net lease properties, is a new player who has yet to prove himself. On the other hand, management has ample experience with most other types of real estate – meaning that its diversification into physical real estate should lead to increased earnings growth over time.

    But investors will want to keep an eye on this real estate portfolio to make sure it goes well and becomes a vital part of mREIT's business. Otherwise, this could only add complexity without increasing cash flow stability and dividend security.

    Next, it is important to know that while Starwood has a relative advantage over smaller companies in terms of scaling and deal flow, it does not only compete with other commercial mREITs

    In 2017, several large private equity funds launched their own own commercial mREITs, and as Starwood's CEO has noted, increased competition from investment banks (especially in the ownership of commercial real estate) is also a problem. [19659151] We have recently reinstated some other investment banks in the stock market just because they are fairly chartered banks and are looking for spread. That we do not want to see do not want to see something like that, and that's a great offer, so we can not keep up all right? They lend themselves at the window in vain and we can not, so we would like to see the banks remain banks and not bring large real estate transactions into their balance sheets the returns and returns of the trading business are not going so well. So, I would say that's a warning, that's a warning sign. -Berry Sternlicht, CEO

    As another colleague Michael Boyd has explained, increasing competition in commercial mREITs, generated by the same stronger economy that drives the industry's growth, creates its own risks. With commercial loans typically only taking three to five years (the average value of Starwood is 3.4 years), management faces a hamster wheel problem.

    In other words, unlike equity REITs whose cash-flow producing assets are sustainable, MREITs that are not continually investing heavily, their core EPS will decline rapidly over time as old loans mature.



    (Source: Starwood Income Replacement)

    For that reason, Starwood's loan book shrank in the first quarter of 2018, even though it was $ 1.2 billion. Repayments of older loans ($ 1.5 billion) were enough to make up for them. And while it is true that Starwood will benefit from rising LIBOR interest rates (which bulls focus on), its ability to make new profitable loans quickly enough to further increase its profits could be adversely affected if the supply of capital in that one Market exceeds demand.

    So far, management has done a good job of doing good business, but its ability to continue doing so while avoiding potentially costly mistakes (which Brad worries about) is not guaranteed. In addition, we must not forget that all mREITs have the potential to fall into a liquidity trap.

    That's the case when the stock price drops so low that raising equity capital growth becomes impossible. Remember that mREITs, like their equity REIT cousins, must pay out 90% of their taxable net income as a dividend (not the same as EPS or GAAP EPS). This means that they only make very small profits and often need to tap and tap stock markets to raise capital to expand their asset base.

    The biggest problem is when the price of a MREIT falls below its book value, which would make it unprofitable to raise equity. Thankfully, the price of Starwood stock is still trading at a premium. However, note that in the first quarter of 2018, management repurchases shares at an average price of $ 20.94, just 2% below the current share price.

    This might suggest that management believes that a stock price of $ 22 or more is needed to grow profitably via stock issues. If this is the case, then Starwood faces additional risks as its growth potential, while offering attractive deals, is somewhat overbearing the moody stock markets. In fact, one of Brad's biggest concerns over Starwood is that the growing conglomerate nature of his business will cause the market to receive a lower premium due to its more complex nature.

    Personally, I have the opposite view of what that is. If the management develops and manages its equity portfolios well, the price of the stock should rise. This is due to the more stable nature of the cash flows that these rental properties generate, which means less risk of future dividend cuts, and more chances that dividends will increase over time.

    After all, we can not forget Starwood's core EPS can be very cyclical because it's ultimately tied to the health of the economy as a whole. The MREIT IPOD was placed at the bottom of the property market, meaning that it was only publicly traded during the improvement of economic conditions.

    In particular, rising real estate prices mean that possible failures can be easily overcome historically low LTV ratios. Während einer Rezession könnten jedoch sinkende Preise für Gewerbeimmobilien sowie ein erhöhtes Angebot an säumigen Immobilien dazu führen, dass das mREIT große Verluste erleidet, die das Kern-EPS schmälern und die Dividende gefährden.

    Dies könnte der Grund dafür sein, dass das Management mit Dividendenerhöhungen so konservativ war. Mit anderen Worten, Starwood bereitet sich vielleicht auf einen regnerischen Tag vor, indem er vor der nächsten Rezession eine Menge Sicherheitspuffer für die Dividende aufbaut.

    Die gute Nachricht ist, dass es bisher nur wenige gibt Anzeichen, dass wir in den nächsten Jahren einem wirtschaftlichen Abschwung ausgesetzt sind. Zum Beispiel hat die St. Louis Federal Reserve einen Rezessionsrisikoindikator, der die letzten sieben Rezessionen (um etwa sechs Monate) genau vorhergesagt hat. Beachten Sie, dass diese Zahl ungefähr dem Risiko entspricht, dass sich die Wirtschaft bereits in einer Rezession befindet.



    (Quelle: St. Louis Federal Reserve )

    Insbesondere die geglättete Rezessionswahrscheinlichkeit, die bei 0,1% liegt Die letzte Lesung im Februar ist 200-mal niedriger als die Mindestschwelle von 20%, die auf vergangene Rezessionen hindeutet. Wenn Sie jedoch etwas überwachen, das so komplex ist wie die US-Wirtschaft, können Sie nicht nur einen einzigen Indikator verwenden, sondern sollten mehrere bestätigen.

    Der zweite makroökonomische Indikator, den ich beobachte, ist das Baseline- und Änderungsraten- oder BaR-Analysediagramm . Dies ist eine Metaanalyse mit 19 führenden Indikatoren, die jeden Aspekt der US-Wirtschaft verfolgen.



    (Quelle: Economic PI )



    (Quelle: Economic PI)

    Das BaR-Gitter hat sich als verlässlicher Indikator für die Rezessionen 1980, 1990, 2001 und 2007 erwiesen. Mit acht von 19 Wirtschaftsindikatoren im Expansionsquadranten (was auf ein beschleunigtes Wachstum hindeutet) und 11 von 19, die immer noch ein positives (wenn auch verlangsamendes) Wachstum aufweisen, gibt es wenig Anlass zur Sorge. Beachten Sie jedoch, dass vor einem Monat 12 dieser Frühindikatoren ein beschleunigtes Wachstum zeigten und jetzt nur noch acht sind. Der Mittelwert der Koordinaten hat sich von einer positiven Veränderungsrate in eine neutrale Position bewegt, was ein negativer Trend ist, den ich in den kommenden Wochen und Monaten genau beobachten werde.

    Glücklicherweise bestätigt die ökonomische Meta-Analyse von Jeff Miller einen niedrigen Short (19659176) (Quelle: Jeff Miller )

    Jeffs Meta-Analyse mehrerer Frühindikatoren deutet darauf hin, dass das Risiko einer Rezession in den nächsten vier und neun Monaten bei etwa 0,71 liegt % bzw. 18%. In der Zwischenzeit hat der Rentenmarkt im Laufe der Zeit eine etwas höhere Inflation eingepreist, was darauf hindeutet, dass ein stärkeres Wirtschaftswachstum anhalten wird.

    Die Kombination aller drei Metaanalysen zeigt uns, dass die US-Wirtschaft weiterhin stark ist. Das Wachstum könnte sich nicht mehr so ​​beschleunigen wie in den letzten Quartalen, aber es ist auch nicht wahrscheinlich, dass es in absehbarer Zeit erheblich nachlassen wird. Dies verheißt Gutes für Starwood und andere kommerzielle mREITs, die sich in einem starken wirtschaftlichen Umfeld bewähren, das durch steigende Zinsen und eine starke Nachfrage nach gewerblichen Hypothekenkrediten gekennzeichnet ist.

    Vergessen Sie jedoch nie, dass bisher kein mREIT, gewerblich oder privat, in der Lage war um seine Dividende durch eine Rezession zu erhalten. Während ich zunehmend davon überzeugt bin, dass Starwood diesen Trend auffangen könnte, bis wir tatsächlich sehen, wie sich seine Gewinne und Dividende in einem Abschwung halten, muss ich es als risikoreiche Dividendenaktien einstufen.

    Dividenden-Risikobewertungen

    • Niedrig Risiko: Hohe Dividendensicherheit und vorhersehbares Wachstum für 5+ Jahre, maximale Portfoliogröße 5% (Kernbeteiligung, SWAN-Kandidat)
    • Mittleres Risiko: Dividende sicher und potentiell für die nächsten zwei bis drei Jahre, maximale Portfoliogröße 3%.
    • Hohes Risiko: Dividende sicher und vorhersehbar für ein Jahr, maximale Portfoliogröße 1,0%.

    Beachten Sie, dass dies nicht bedeutet, dass die aktuelle Dividende zumindest während einer starken Wirtschaft unsicher ist. Rather, I classify dividend risks by a company's ability to maintain and hopefully grow the payout during an entire economic cycle, including recessions.

    As a high-risk stock, I personally recommend anyone owning Starwood do so only as part of a well-diversified dividend portfolio (1%). Personally, if Starwood's dividend survives the next recession (whenever that is) intact, I'll upgrade it to medium risk and initiate a position of up to 3%. If the dividend survives two recessions, then it will become a low-risk stock and I'd be willing to invest up to 5% of my portfolio in it.

    Bottom Line: Starwood Is One Of The Industry's Best Names Assuming You're Comfortable With The Risks

    Don't misunderstand me, Starwood Property Trust, while one of the best managed commercial mREITs you can buy, remains a high-risk stock. That is until it can prove its business model can sustain the dividend during a recession.

    That being said, its highly experienced management team, very conservative approach to underwriting, increasing diversification into stable cash flow rental properties, and industry-leading low payout ratio give me confidence that it has a better-than-average chance at proving to be a good long-term high-yield investment.

    And while the share price is no longer trading at its correction lows, the current valuation still represents a potentially good entry point for anyone comfortable with this industry's unique risk profile.

    Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    I wrote this article myself, and it expresses my own opinions. I do not receive any compensation for it (except from Alpha search). I have no business relationship with any company whose stock is mentioned in this article.


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