Summary
- I am reducing my investments in high-yield/high-risk income vehicles due to increased market volatility and a scaled back interest rate path.
- Starwood Property Trust did not cover its dividend with core earnings in Q1-2019 due to a write-down of an interest in a regional mall portfolio.
- A escalating trade war could, in the worst case, trigger a U.S. recession.
- STWD sells for 1.3x book value.
- An investment in STWD yields 8.6 percent.
As part of a major portfolio reshuffling this week, I have sold my investment in Starwood Property Trust (STWD) because the company did not cover its dividend payout with core earnings in the last quarter, and the Fed scaled back its interest rate path back in March which means companies with large floating-rate asset bases have muted net interest income upside. Increasing uncertainty regarding the U.S.-China trade stand-off also helps make a case for taking profits in income vehicles that have had a good run.
Starwood Property Trust - Portfolio Overview
The first quarter of 2019 was a mixed one for Starwood Property Trust. The commercial mortgage REIT's dividend coverage ratio deteriorated (discussed later), but mortgage origination activity remained solid in the first quarter.
Starwood Property Trust continued to benefit from strong demand for new mortgage loans in the first quarter thanks to robust fundamentals in the U.S. commercial real estate market. The company originated $1.0 billion worth of new loans in Q1-2019, all of which were floating-rate.
