Why I Just Bought This High-Yield Dividend Stock

By Markets Fool.com

As a commercial mortgage REIT, Starwood Property Trust comes with an enticing 8% yield -- but that's not the only reason to be interested. Great companies create value over time, and Starwood Property creates value by making loans to businesses for commercial properties, as well as investing in other types of commercial mortgage debt.

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But lending is not a unique business, so I focused on what makes Starwood Property different. The answer is why I bought the stock, and why I believe the company will continue to create value over time.

Unique access
Starwood Property has $6 billion in commercial loans spread across the U.S. and Europe. To compete on this scale, you need access to capital, information, and asset management.

Starwood Property has 12 different credit facilities from which it can receive secured financing -- using collateral to borrow. The company currently has $4.3 billion in available credit, and this has more than doubled in the last two years. Starwood Property can also issue bonds, which it has $1.4 billion outstanding, and as a public company, it can raise capital by issuing shares of stock. All said, the company has more than enough funding opportunities to support growth.

Being a member of the Starwood family covers the remaining requirements. Under the Starwood umbrella there is a home builder, regional mall operator, owner of single-family homes, andStarwood Hotels, which are supported by Starwood Capital one of the largest asset managers in the world and founder and current CEO of Starwood Capital and Starwood Property, Barry Sternlicht.

The ability to leverage the manpower and global scale of Starwood Capital, and the incredible depth of industry experience of Barry Sternlicht and his team, Starwood Property has access to transactions, asset management, and unique insight to the commercial markets.

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A flexible business model
With $42 billion in assets, having a large partner like Starwood Capital gives Starwood Property more resources than most. But it is much smaller than today's largest banks, asset managers, and insurance companies, which can sport total assets over $1 trillion.

To stay competitive, Starwood Property creates value for borrowers by being more flexible and handling more complex loans. In Starwood Property's third quarter 2014 conference call, Sternlicht explained such a situation:

I consider the construction loan on Hudson Yards one of our best loans [...] its super complicated, that's how we got it. In fact, the borrower called us and said, "Can you help us? Because the five banks are tripping over each other."

Two important things there: First, the borrower called Starwood, not everyone -- that is a big advantage. Second, the reasons the banks were tripping over each other is due to regulations. Because Starwood Property is not regulated in the same way, it can be more flexible, and this benefits borrowers. Sternlicht mentioned this in the company's first quarter 2014 conference call:

Because the banks really can't do these big construction loans when Basel III kicks in. The capital [regulations] for them are brutal. So you're going to see a complete makeover of construction lending in the United States.

Starwood Property can make a wide range of loans, but my examples focus on construction loans because they help hone in on the company's ability to go when banks can not. This flexibility is valuable to borrowers, and creates a competitive advantage.

Disciplineand execution
The final piece to the value creation puzzle is being disciplined and executing on opportunities.

Starwood Property has an experienced management team that has been together for over 14 years. Under this leadership, the company has deployed $17 billion since going public in 2009, created a total return for shareholders of 80% since 2012, acquired the world largest commercial special servicer, LNR -- collects fees for working with commercial borrowers currently defaulting on loans -- and has become the largest commercial mortgage REIT in the process. There is little doubt that Starwood Property can capture opportunity.

According to Sternlicht, "Every mortgage REIT in history has got in trouble getting further and further out on the risk spectrum, making sloppier and sloppier loans. We don't intend to be one of those guys."

Starwood Property's portfolio has an average loan-to-value ratio below 65%. This means the size of the company's average loan covers 65% of the value of the asset being used as collateral. This creates a sizable cushion in case asset values fall. More important, despite often making unique loans, Starwood Property has yet to have one of its loans default.

This is not suggesting that Starwood Property is risk-free, or will never make a bad loan: I am sure it will. But I believe the experience of Starwood Property's management team, and its focus on being a disciplined lender, separates the company from the pack.

A business that creates value
Being a member of the Starwood family gives Starwood Property a place at the table, but its business model and execution is what sets it apart. If you're looking for a great business, with a big dividend, that has all the tools to create value over time, I recommend considering Starwood Property Trust.

The article Why I Just Bought This High-Yield Dividend Stock originally appeared on Fool.com.

Dave Koppenheffer owns shares of Starwood Property Trust. The Motley Fool owns and recommends shares of Bank of America and Apple. 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.