September 18, 2021

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Beauty Made Perfect

Better Buy: Apollo Commercial Real Estate Finance vs. Starwood Property Trust

Apollo Commercial Real Estate Finance

Apollo Commercial originates and invests in senior notes, mezzanine loans, and other commercial real estate-related debt, having a portfolio of roughly $6.8 billion in loan amortization balances. As of Q1 2021, 84% of the company’s portfolio is senior loans and includes loans both in the United States and Western Europe. The company focuses on lending for properties in gateway markets, with a diversified portfolio of commercial properties. However, its largest underlying assets of its 67 loans are office (26%) and hotel (23%), two sectors that have been hit hard by the global pandemic. Its largest operating market is New York City, with roughly 35% of all loans being located there, followed by the UK, which makes up 22% of its portfolio. Both areas have had stringent COVID-19-related closures, although the company has not shared its explicit impact from the pandemic in their latest earnings report. The company has $356 million in liquidity with low debt-to-equity ratios and fairly conservative payout ratios when compared to other mREITs.

Starwood Property Trust

Starwood Property Trust is first and foremost a commercial lender, having roughly 64% of its portfolio made up of senior and mezzanine commercial loans, but the company also lends on infrastructure projects and residential non-agency loans. Starwood, as of Q1 2021, has around $18 billion in loans under management, including loans in the United States, Asia, Europe, and Australia. Of its 122 commercial-related loans, 32% are office, followed by hotels and multifamily, which each make up 19%. Starwood Property Trust has $351 million in cash and cash equivalents at the start of 2021, something it has improved significantly over the past year. Its servicing branch reached record volumes over the past quarter.

Which is the better buy?

Starwood’s larger portfolio size allows it to have greater diversification than Apollo Commercial, which provides slightly more security in the current economic climate. While both seem to be increasing capital deployment and new loan originations, which help drive business moving forward and increase revenues as loans mature, Apollo’s lower payout ratios and debt-to-earnings ratio really set it apart out of the two. This, coupled with its higher return, makes it a more favorable buy at this time; however, both are worthwhile investments in their prospective markets.