We recently compiled a list of the 10 Cheap REITs with Huge Upside. In this article, we are going to take a look at where Starwood Property Trust, Inc. (NYSE:STWD) stands against the other Cheap REITs with Huge Upside.
How is the US Real Estate Market Unfolding?
In the week ending October 24, the average rate on a standard, 30-year fixed mortgage was 6.54%, hitting its highest level since early August. Previously, the mortgage rates dropped to their lowest since early February 2023 after the Fed made its first big rate cut. However, home buying activity hasn’t accelerated as such. Sales of previously owned homes accounting for the majority of the market declined 1% in September from the preceding month. On the contrary, new home sales rose 4.1% in September.
While the slow demand could be attributed to lower rates coming too late for many homebuyers as they tend to buy and sell homes in the spring season, some are hoping for the rates to fall even lower as they look forward to the Fed’s upcoming rate cuts. At the same time, a chronic shortage of inventory is harming the market, with home prices rising in September for the 15th consecutive month.
On October 25, Robert Reffkin, Compass CEO, appeared on CNBC to discuss the housing market. He mentioned that the mortgage rates although on the rise, are a lot better than what they were one year ago at 8.2%. Since consumers react more to the change in the mortgage rate than the absolute rate itself, pending home sales are up 10% year-over-year.
In another interview with CNBC, Alan Ratner, Zelman & Associates managing director, emphasized that the rise in the mortgage rates is the equivalent of a 6% increase in home payment prices. While the resale home market remains constrained due to a lack of inventory, the new home market is showing solid activity. In the prevailing conditions, builders have a competitive advantage over the resale market as they are buying mortgage rates down. However, rate buydowns and other incentives are pressuring gross margins while the opportunity to raise prices or lower incentives to drive the margin back up remains low amidst severe affordability issues.
Is the Commercial Real Estate Sector Recovering?
Lower interest rates are expected to benefit rate-sensitive sectors such as commercial real estate by bringing positive momentum. According to Wells Fargo analysts, the Fed’s shift in policy is the most notable green shoot for the commercial real estate market. Additionally, Alan Todd, head of commercial mortgage-backed security strategy at Bank of America, deems the primary impact of interest rate cuts psychological. Hence, a sense of stability would enable borrowers to get off the sideline and start to transact as the Fed continues its rate cutting.
On September 23, Willy Walker, Walker & Dunlop chairman and CEO, joined CNBC’s ‘Squawk on the Street’. He mentioned how the refinancing and sales volumes are picking up as the sentiment around commercial real estate improves. Furthermore, the second quarter of 2024 witnessed the overall transaction volumes recording their first quarterly increase since 2022. Over $40 billion in transactions took place in the quarter which marked a 13.9% quarter-over-quarter increase.
The multifamily sector is demonstrating strength as well with net absorption totaling 126,600 units in Q2, the sixth-highest Q2 total in more than 20 years. Additionally, the overall multifamily vacancy rate remained unchanged at 5.5% in the quarter after two years of quarterly increases. With demand outpacing new deliveries, the vacancy rate should start to fall toward its long-run average of 5% in subsequent quarters as reported by CBRE.
While the aforementioned dynamics seem to lay the foundation for commercial real estate recovery, the office sector still remains stressed and plagued with challenges. Although the sector has shown some improvement in Q2 with the office net absorption turning positive for the first time since 2022, problems such as rising vacancies and supply outpacing demand continue to persist. Hence, the office sector despite showing some progress, still has a long way to go.
Our Methodology
In order to compile a list of the 10 cheap REITs with huge upside, we first used Yahoo stock screener to find a list of REITs with a forward P/E under 15. We then selected the 10 stocks that had the highest upside potential. The 10 cheap REITs with huge upside are arranged in ascending order of their average upside potential, as of October 24.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Starwood Property Trust, Inc. (NYSE:STWD)
Average Upside Potential: 17.01%
Forward P/E: 10.20
Number of Hedge Funds: 25
Starwood Property Trust, Inc. (NYSE:STWD) is an affiliate of the global private investment firm Starwood Capital Group. The firm serves as one of the largest commercial mortgage REITs in the United States. It has been organized into complementary business segments including real estate lending, real estate investing and servicing, property, and infrastructure lending.
Starwood Property Trust has a distinct position in the global real estate finance market as one of the world’s leading diversified real estate finance companies. The REIT has navigated multiple real estate cycles and has deployed more than $98 billion of capital since its inception, as of June 30. With the average size of its loans being approximately $100 million since inception, the scale of the firm is clear. Since Starwood Capital Group is one of the largest institutional real estate investors globally, Starwood Property Trust takes advantage of its global reach.
Since the firm has been diversified into investment cylinders other than commercial lending, it has outperformed in a relatively challenging global property market. However, the management believes that the hard phase is behind them, with an easing US and Europe market to be seen in the future. The firm’s access to capital and liquidity has further allowed it to consistently invest across its businesses.
Starwood Property Trust, Inc. (NYSE:STWD) is a top diversified real estate finance company with a market capitalization of $6.74 billion. Since the firm’s founding 15 years back, it has delivered a consistent dividend and an over 10% annualized return. The REIT boasts a portfolio of $26 billion across the Commercial and Residential Lending, Infrastructure Lending, Investing & Servicing, and Property business segments.
Overall STWD ranks 6th on our list of the other Cheap REITs with Huge Upside. While we acknowledge the potential of STWD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than STWD, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
