What's In Store For Starwood Property (STWD) In Q4 Earnings?

Starwood Property Trust (NYSE:STWD) is scheduled to report fourth-quarter results on Feb 28, before the opening bell. The company’s results will likely reflect year-over-year decline in earnings per share (EPS), while revenues are expected to record growth.

In the last reported quarter, this mortgage real estate investment trust (mREIT), focused on origination and acquisition of commercial property mortgages and commercial real estate in the United States and Europe, posted core EPS of 53 cents, in line with the Zacks Consensus Estimate. Robust performance from the commercial and residential lending segment supported results.

Over the trailing four quarters, the company outpaced the Zacks Consensus Estimate in three occasions and met in the other. It delivered average positive surprise of 6.30% during this period.

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Starwood Property has made concerted efforts to diversify its business to commercial mortgage servicing as well as acquiring real equity properties that offer stable cash flows. Amid volatility and uncertainty in the market during the Dec-end quarter, we anticipate this diversification to provide a competitive edge to the company and support its results.

Further, the acquisition of General Electric’s energy finance business in mid-2018 will likely enhance the company’s earnings in the quarter under review.

Per a study by CBRE Group, Inc. (NYSE:CBRE) , commercial lending activity was strong in the fourth quarter, as indicated by 13.6% year-over-year growth in CBRE Lending Momentum Index. In fact, alternative lending, such as REITs, financing companies and debt funds, accounted 25.3% of loan closings, marking an expansion of 530 basis points year over year. Encouragingly, average commercial loan spreads also tightened in the to-be-reported quarter.

Against this backdrop, the company’s robust commercial loan business is expected to have performed well during the Oct-Dec period. In fact, a significant portion of this portfolio has adjustable interest rates, hedging its segment income against rising interest rate.

Also, higher interest rates generally lead to an uptick in loan defaults. Hence, Starwood Property’s real estate service segment is expected to have enjoyed higher servicing fee income.

In fact, the Zacks Consensus Estimate for fourth-quarter 2018 revenues is pegged at $269.8 million, reflecting 11.1% improvement on a year-over-year basis.

However, escalating short-term interest rate during the quarter under review has resulted in lower refinancing activity, thereby impacting CMBS issuance for 2018 by 12%. This is expected to have dampened the company’s activity within its Investing and Servicing segment.

Lastly, the company’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for fourth-quarter 2018 EPS remained unchanged at 54 cents in a month’s time. In addition, it indicates a 5.26% year-over-year decline.

Earnings Whispers

Our proven model does not conclusively show that Starwood Property is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earning ESP: Starwood Property’s Earnings ESP is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell), which decreases the predictive power of ESP.

It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are a few stocks in the REIT space that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hersha Hospitality Trust (NYSE:HT) , scheduled to release earnings on Feb 25, has an Earnings ESP of +3.45% and holds a Zacks Rank of 2.

Senior Housing Properties Trust (NASDAQ:SNH) , set to release earnings on Mar 1, has an Earnings ESP of +36.36% and holds a Zacks Rank of 2.

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