Author Topic: Investing in REIT - specifically STWD (Starwood Property Trust)  (Read 5540 times)

dundee

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Hello fellow investors:

Currently I don't have any REIT in my portfolio. Looking at the yields in Google Screen, I found STWD (Starwood Property Trust) that is yielding 8.9% which is pretty attractive.

It is also down about 16% from its peak in the last year or so.

I would start out small like 5% of my total holding in STWD. Can more informed investors weigh in on the choice of REIT in general and Starwood in particular?

Thank you.

forummm

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #1 on: July 27, 2015, 12:26:15 PM »
Do you have any S&P500 index fund or total stock market fund? Well then you actually do have REITs in your portfolio--including STWD.

The yield has nothing to do with whether it's a good idea to buy this stock. The pricing should be appropriate for its long term value--just like every other mid or large cap stock. If you want REITs for some reason, you would probably be better off getting Vanguards REIT fund so you have a diversified REIT portfolio.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #2 on: July 31, 2015, 06:43:04 PM »
Hello Dundee,
It is difficult for me to give advice regarding an investment in STWD without knowing exactly where you are coming from...  I'll start by just discussing what Starwood is, then I will discuss my own investment strategy and leave it to you to decide what course of action is appropriate

STWD is a REIT, that is true, but it is not typical for that designation. Most REITs own property, which they lease to tenants and pass the profit on to the shareholders. It's a fairly simple and straightforward business model. STWD on the other hand is a mortgage REIT. This means that it invests capital in mortgages (in STWDs case commercial mortgage backed securities) and borrows money at short term interest rates to do so. In other words it probably borrows at low interest rates possibly like the short term LIBOR (currently .19%) and buys mortgages paying 3 to 6%. Unfortunately it is difficult to assess these stocks, as it's very difficult to ascertain the exact details of what they own. Some will buy options or future to hedge interest rate changes. Some purchase CDOs as insurance... And so on.  I am not an expert on these things and as such I DO NOT buy common shares of mortgage REITs.  The possibility of interest rates rising in the near future could crush these companies, but it's extremely difficult to predict.  If the short term interest rates the companies borrow at go above the return of the mortgages they hold, then there is a definite possibility of bankruptcy.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #3 on: July 31, 2015, 07:02:14 PM »
Follow-up

REITs account for up to 30% of my portfolio, so as you can tell, I greatly appreciate them. I invest primarily in equity REITs - those that invest in physical property. My current portfolio includes EPR, O, OHI, UBA, and WPC. The income provided by these are very stable and they all have fairly conservative balance sheets with reasonable amounts of debt to avoid large losses when property values are falling.  The yields currently range from about 4.75 to 6.5%. I tend not to buy mortgage REITs unless I'm considering the preferred shares. If you are investing primarily for current yield and don't need price or dividend appreciation you can consider buying the preferred shares of some mortgage REITs. There are a lot of details to trading preferred stock but in general you need to understand that they are similar to bonds in that they pay a coupon rate which must be paid to shareholders before any dividends can be paid to common stock. Since REITs are mandated by law to pay out 90% of their earnings to shareholders that means your dividends are well protected as long as the fundamentals of the company are stable.  There are other details of preferred stock to be aware of, including the fact that they are callable by the issuer. Still, if you are interested you can research AGNCB, AGNCP, ANHpC, NLYpA. The yields are closer to 8%.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #4 on: July 31, 2015, 07:06:27 PM »
I hope those posts help but I am not a financial advisor. I just hope the explanation helps clarify some things.

mrpercentage

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #5 on: July 31, 2015, 07:40:38 PM »
Reido what do you think of DOC? I have been eyeballing that but I'm building cash right now.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #6 on: August 01, 2015, 06:22:55 AM »
Hello Mrpercentage,

I currently hold OHI as my exposure to health real estate.  I have looked into DOC in the past.  There are positives and negatives with DOC.  Good things include very low debt with only 19.5% debt to cap ratio! A high growth rate with aFFO per share growing at a rate of 20+%  It has a nice yield of 5.67%

Issues, however, are that it trades at a p/aFFO of about 16 if you assume a forward aFFO of $1.00 per share which may be an aggressive assumption. This makes it expensive relative to the sector which has an average of around 12-13. Another issue is dividend coverage - right now the dividend is not safe unless the company can grow its assets adequately to continue the dividend at its current rate, let alone growing it.

My take: it's an aggressive company that could pay off well if they can continue to grow at such an aggressive rate. Personally, my risk tolerance is fairly low so I go with OHI which is also growing quickly, but trades at a lower ratio and has good dividend coverage.

One other key attribute I look for in a REIT was how safe their dividend is historically. Specifically I like to look at whether or not they cut the dividend in 2008/2009 and if they cut it, how long it took for them to reinstate it. It's like a "stress test" of sorts to see how the company held up when times were tough. OHI kept increasing the dividends over that time period, while DOC is too young to tell, but given the inadequate dividend coverage I doubt that the dividend would be maintained if the Great Recession were to happen again tomorrow.

In the end DOC is a little too aggressive for my taste but may treat you we'll in the long run. Hope this helps.

soccerluvof4

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #7 on: August 01, 2015, 07:49:07 AM »
I would look at the VGSLX in Vanguard as away to be somewhat overweight in Reits Instead of being a stock picker. It has a current yield of just over 4%. I too like to be overweight Reits. Other Wise there is the VNQ if you want to do an ETF.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #8 on: August 01, 2015, 02:04:23 PM »
I see myself as an indexer for the most part.  Most of my assets are in efts and index funds.

Still, I pick individual REITs because I see way too much risk in most of the indexes. The VNQ is heavily weighted toward only a few REITs and most did very poorly in 2008/2009.  Keep in mind VNQ fell 65% from peak to trough over that period. Furthermore, dividends fell by over 83%!  In 2007 the ETF paid $3.58 in dividends followed by only $.58 in 2009. Even in 2014 it only paid $2.91 per share - still 18% below what it paid 8 years ago. 

Much of the fall is due to heavy leverage that was used in prior years, with many of the low quality REITs being forced to sell properties at poor valuations or take a huge hit when accessing the capital markets in the past. These are the REITs I try to avoid so as to lower my overall risk. I'm not trying to outperform he index, merely to generate a more stable income source.

I invest for reliable income. VNQ and VGSLX do not provide reliable income. Nor do they protect your principal.  I save the index funds for stock and bonds where they work very well.

mrpercentage

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #9 on: August 01, 2015, 03:06:35 PM »
Thanks Reido.

Im interested in Retail, Medical, and Cyber/Internet REITs. I also favor lower stock price with higher yields as they are easier to build into monthly with Robinhood and compound faster. DOC fits two of my interests. A newer unproven REIT has the added bonus of possibly rocketing into space but then again-- I don't like things blowing up in my face. Im with you on 2008-2009. I would much rather be able to use that as an additional screener, and would prefer a secured a dividend. Thanks for your insights.

Do you have a source for screening REITs? I could easily diversify with Robinhood allowing really small purchases (commission free) but would much rather build into significant positions, one company, and perhaps one year at a time. I need to be really selective doing that, thinking only of long term, and ignoring most market volatility.

forummm

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #10 on: August 01, 2015, 03:20:33 PM »
I see myself as an indexer for the most part.  Most of my assets are in efts and index funds.

Still, I pick individual REITs because I see way too much risk in most of the indexes. The VNQ is heavily weighted toward only a few REITs and most did very poorly in 2008/2009.  Keep in mind VNQ fell 65% from peak to trough over that period. Furthermore, dividends fell by over 83%!  In 2007 the ETF paid $3.58 in dividends followed by only $.58 in 2009. Even in 2014 it only paid $2.91 per share - still 18% below what it paid 8 years ago. 

Much of the fall is due to heavy leverage that was used in prior years, with many of the low quality REITs being forced to sell properties at poor valuations or take a huge hit when accessing the capital markets in the past. These are the REITs I try to avoid so as to lower my overall risk. I'm not trying to outperform he index, merely to generate a more stable income source.

I invest for reliable income. VNQ and VGSLX do not provide reliable income. Nor do they protect your principal.  I save the index funds for stock and bonds where they work very well.

I think your thinking is backwards here. By being less diversified (individual stocks) you are taking on more risk than if you had a broadly diversified index fund.

And it makes sense that REITs fell harder during the last crash--it was a housing market bubble-induced crash! Of course real estate related businesses had a higher peak-to-trough. Their peak was greatly inflated, and the trough was also amplified due to the foreclosure and credit crisis. This is a perfect example of you taking on more risk by not being diversified. VTSAX didn't fall by as much.

Investing for income doesn't make much sense. There's no difference between selling appreciated shares (because the business retained earnings) vs spending the dividends (because the business did not retain their earnings).

mrpercentage

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #11 on: August 01, 2015, 04:39:03 PM »
Negative Forumm. Not all REITs did. Look at O's chart vs the S&P 500. It was much more stable. It has hard assets- retail property. Thats the point of picking stocks. You can pick the strong ones. Sure you can pick weak ones as well but that comes down to ones own ability and luck. I trust myself over a random selection.

There is a huge difference between income and growth. Its called capital gains tax. Also (during retirement) when the market is doing poorly you are not selling shares at low rates because you are not selling at all. Big difference. It is the infinite pool so forget the 4% rule. You built the income stream up to what you need. Not for everyone but certainly valid.

forummm

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #12 on: August 01, 2015, 05:31:30 PM »
Negative Forumm. Not all REITs did. Look at O's chart vs the S&P 500. It was much more stable. It has hard assets- retail property. Thats the point of picking stocks. You can pick the strong ones. Sure you can pick weak ones as well but that comes down to ones own ability and luck. I trust myself over a random selection.

There is a huge difference between income and growth. Its called capital gains tax. Also (during retirement) when the market is doing poorly you are not selling shares at low rates because you are not selling at all. Big difference. It is the infinite pool so forget the 4% rule. You built the income stream up to what you need. Not for everyone but certainly valid.

Of course not all stocks dived. But the point is that you can't know for sure which ones will. I know that looking back in time it's easy to see that O didn't. But I'll bet you didn't have all your money in it beforehand. And some stocks like Family Dollar actually gained 30% while Lehman and Bear and Fannie went to ~0. Sometimes surprises happen.

Long term capital gains tax is the same as the tax on dividends. And selling shares that temporarily dropped is the same as spending dividends that you aren't using to buy more shares with. They are both a depletion of capital. The former you get to control. The latter the BOD decides for you.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #13 on: August 01, 2015, 06:29:58 PM »
@mrpercentage
What I did to screen the REITs was mostly by hand. There are about a hundred or so publicly traded REITs on the nareit.com website. I then typed each into the Nasdaq.com dividend history and looked back to which ones cut their payouts significantly and eliminated those. Then I used my brokers website for further information. I use scottrade for my cash account.  For the record, I always follow articles by brad Thomas on seeking alpha. I subscribe to his newsletter (most of the good articles are free anyway so you don't need to).   He always has the most up to date ratios and comparisons with his articles.

@forumm
You're missing what it is I'm trying to do.  Let me explain. I am attempting to minimize beta and am totally aware of the decrease of alpha that will ensue.  If you look at indexes check out the ETF SPLV.  SPLV is the low volatility S&P index and it basically simply minimizes beta and is its own index. This does not at the current time exist for REITs so I am forced to essentially engineer my own index fund based in consistency of earnings.

Again I'm not trying to outperform. I'm just trying to pick individual entities that are lower risk. Not much different than buying utilities or pharmaceuticals as an effort to invest in stocks while minimizing variance.

My purpose in investing for income, again, goes along the lines of generating consistency. Keep in mind that a more consistent portfolio runs a lower risk of ruin than a consistent one. The s&p generates a far greater average return than 4% but that's generally accepted SWR because variance is high and can devastate a portfolio during a drawdown.

Reido

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #14 on: August 01, 2015, 06:48:58 PM »
@mrpercentage
Also, good luck to you with DOC.  It will likely be a great choice!

@ forummm
If you look back to the financial crisis you'll see that the healthcare and utility sectors were less affected than some other sectors. In this case the "safer" sectors did, in fact, outperform (or perform less badly)

mrpercentage

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #15 on: August 01, 2015, 07:25:42 PM »

My purpose in investing for income, again, goes along the lines of generating consistency. Keep in mind that a more consistent portfolio runs a lower risk of ruin than a consistent one. The s&p generates a far greater average return than 4% but that's generally accepted SWR because variance is high and can devastate a portfolio during a drawdown.

Exactly. A draw down with an income strategy is a good thing. Provided you chose wisely your dividend is safe and it is buying even more shares giving you higher income and an amplified rebound when the market returns. You are on an escalator instead of a rollercoaster.

I still disagree with those who claim dividends and a sale of equity are the same thing but Im done arguing my point. Income is more sustainable than growth. When the baby boomers all start pulling their investments (very soon) it can be a negative drag on the market. However, if they all were income investors that will live off the dividends-- well then, it wouldn't effect a damn thing. Income investing is sustainable. Growth is an inevitable pyramid scheme. Boom and bust.

forummm

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #16 on: August 01, 2015, 07:33:36 PM »
The next crisis is usually not the same as the last crisis. It's easy to know what to have invested in in hindsight. Foresight is not as easy. Good luck to you.

Left

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #17 on: August 02, 2015, 10:30:49 PM »
Unless I missed something, though I'm likely to just not know how stocks work :D

Even if STWD pays 8.8% dividend, it is down 6.3% YTD, so really you've only netted about 2.5% YTD...
VTI has a 1.8% dividend and is up 2.6% this year, so you net 4.4%....

I know I can't really add them together like this for a real return but I do it for a "quick/dirty" look at how my investments are doing...
Quote
Again I'm not trying to outperform. I'm just trying to pick individual entities that are lower risk. Not much different than buying utilities or pharmaceuticals as an effort to invest in stocks while minimizing variance.
I thought bonds mostly did this :D I mean, if you are investing for stocks, the "volatility" shouldn't scare you off just because they swing up/down...

mrpercentage

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #18 on: August 03, 2015, 01:24:18 AM »
Unless I missed something, though I'm likely to just not know how stocks work :D

Even if STWD pays 8.8% dividend, it is down 6.3% YTD, so really you've only netted about 2.5% YTD...
VTI has a 1.8% dividend and is up 2.6% this year, so you net 4.4%....

I know I can't really add them together like this for a real return but I do it for a "quick/dirty" look at how my investments are doing...
Quote
Again I'm not trying to outperform. I'm just trying to pick individual entities that are lower risk. Not much different than buying utilities or pharmaceuticals as an effort to invest in stocks while minimizing variance.
I thought bonds mostly did this :D I mean, if you are investing for stocks, the "volatility" shouldn't scare you off just because they swing up/down...

Some including myself do not want to be in bonds due to the impending doom of interest rate increases. It has been decades since this has happened. It does effect the value of bond funds-- possible significant loss. This possiblity is what is causing stalled performance in income funds as portfolio managers are paralyzed waiting for the increase so they can place new investments.

The Fed all the way to Warren Buffett have stated that bonds are over valued.




forummm

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Re: Investing in REIT - specifically STWD (Starwood Property Trust)
« Reply #19 on: August 03, 2015, 07:17:17 AM »
The Fed all the way to Warren Buffett have stated that bonds are over valued.

They've said the same things about stocks. But overvalued assets can still produce returns better than cash (which has a negative return).