Initially, mgmt has hoped for a 10% yield to investors. Because the market has gotten so competitive for distressed debt mgmt now targets an 8% yield for investors.
That simply is not an acceptable yield result. IMO move on because mgmt gets their salaries or mgmt fees and perks and shareholders who capitalized this thing are now offered a yield so low that you are better off looking at MLPs with tax deferral advantages.
Citi's analysis suggests ARCC, a buy rated BDC middle market lender is a better choice for risk adjusted yields.
I think your analysis is way off. First of all their has been significant credit tightening in both the real estate and hy/leveraged loan markets since September (the time of the IPO). Both mortgage REITs and BDCs have had to reduce their promised rates of returns. Not unreasonable that they have reduced yield expecations given the massive credit tightening in the market that would have been hard in September to expect. The BDCs that are saying they can get the same returns are now targeting mezzanine/subordinate debt as opposed to a more even mix of senior/sub. STWD will focus on mezz to generate those 10-13% returns. Second, they will use some leverage on the portfolio. They talked on the call today about their discussions with several lenders to get a credit facility. Second, it is entirely reasonable to expect that the stock would have been weak from the IPO date given their need to start deploying the equity raised which will allow them in turn to ramp up the dividend payout. The recent dividend hike and hikes going forward as the TIAA portfolio is levered will allow the Company to increase the dividend. Third your comparsion of dividend yield that ARCC is likely to trade at vs. STWD is I think off the mark. STWD should trade at a lower dividend yield given that the more appropriate analogue in my mind is the dividend yield on REIT stocks as a whole not the dividend yield vs. BDCs. The average dividend yield for REITs is around 4%. I don't think over time it's unreasonable to think STWD could trade at a 6-7% dividend yield. The Company guided to a payout of 9-10% dividend yield at today's price (close to book). Were that to happen there is signficant upside in the stock from current prices. Not to mention the fact that if you believe the Company the assets they have bought (e.g. the Teacher's portfolio etc.) should be worth more than book given credit spread tightening in the market.
Not my analysis. This is Citi's take and their focus is on a market for these securities that is no longer distressed and in fact is getting so many multiple bids that STWD is walking away from more than they get which is why there is so little news.
Citi in their analysis states that mgmt in turn is lowering its yield expectations for shareholders from 10% to 8%.
ARI, STWD, and the other two recent MREIT IPOs dedicated to this area of the market had a great idea but, unfortunately, there are too many players chasing too few deals and that is resulting in higher bids and lower yields to shareholders.
To use the average yield on reits as a macro to justify ownership in STWD is wrong. Property reits owning ppty should be at much lower rates than Mreits.
The key walkaway is mgmt indicating to Citi analyst that a lowering of estimated yield is the effect from the cause.
I agree STWD will sell at a 8% yield and yield 8%.... not much upside unless you are counting on mgmt to share all cap gains with investors. Sternlick does not have that history so yield will be yield and cap growth will come from retaining cap gains; NOT general lower market interest rates which of course will be higher.