Commercial Mortgage-Backed Securities (CMBS)

 

The Starwood Property Trust is a mortgage REIT , or mREIT , meaning it does business by owning, selling and servicing mortgage-backed securities. Unlike residential mREITs such as Annaly Capital Management or American Capital Agency , which primarily focus on mortgages, Starwood Property Trust specializes in commercial mortgages. This is a very important difference, as residential mortgages have a fixed rate, while commercial mortgages have a mostly floating rate, and therefore a low risk.

Commercial mREITs such as Starwood Property Trust, use less leverage than residential mREITs , which means better resilience when financial markets fall.

More important to dividend investors, Starwood Property Trust has one of the best management teams in the industry, generating enough EPS to pay $ 0.48 in dividends for 10 consecutive quarters . This is achieved by the fact that instead of simply issuing or investing in commercial mortgages, Starwood Property Trust makes money in the following ways:

  1. Issue large loans with zero losses and conservative underwriting (currently $ 16.8 billion).
  2. Investing in commercial mortgage backed securities (CMBS – commercial mortgage backed securities): 20 years of experience of successful and profitable investment in various economic conditions and at different interest rates.
  3. Service CMBS loans: Starwood is America’s largest service for collecting payments from borrowers with a portfolio of $ 10.6 billion, for the maintenance of which the company takes from 1.25% to 1.5% commission.
  4. CMBS Release: When Starwood Property lends money to someone to buy commercial property, it can sell some of the loan to other investors, with a profit of course.
  5. Real Estate Portfolio: Starwood Property owns $ 1.2 billion of high quality real estate properties.

Analysts expect rates to rise over the coming years, allowing Starwood Property Trust’s dividend to grow 7.5% annually.

Ultimately, the total expected return could be 16.2% over a horizon of several years.

The Starwood Property Trust is potentially one of the best, and least known, dividend-growth stocks of the next decade.