What To Expect From Starwood Property's (STWD) Q3 Earnings?

Starwood Property Trust, Inc. (NYSE:STWD) is scheduled to report third-quarter 2019 results on Nov 8, before market open. While its revenues are expected to have improved year over year, earnings might display a decline.

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 earnings of 52 cents per share, in line with the Zacks Consensus Estimate.

Over the preceding four quarters, the company met the Zacks Consensus Estimate on three occasions and missed in the other, the average negative surprise being 11.8%. The graph below depicts this surprise history:

STARWOOD PROPERTY TRUST, INC. Price and EPS Surprise

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

A low interest-rate environment and continued positive economic growth supported strong commercial real estate transaction activity during the third quarter. This environment also improved property valuation and overall market sentiment.

In fact, per a study by CBRE Group, Inc. (NYSE:CBRE) , lending activity was strong in the third quarter, as indicated by 5% year-over-year growth in CBRE Lending Momentum Index. In fact, alternative lenders, such as REITs, financing companies and debt funds, led origination activity accounting nearly 30% of non-agency lending volumes.

We anticipate this accommodative environment to have boosted loan portfolio growth and capital deployment across Starwood Property’s segments. In fact, the company’s second-quarter 2019 capital deployment of $2.1 billion was led by commercial lending segment’s deployment of $1.1 billion. This momentum is expected to have continued in the third quarter as well.

Additionally, multi-family agency originations market was robust in the to-be-reported quarter. In fact, year-to-date through September, combined loan purchase volume by Fannie Mae and Freddie Mac totaled $112.8 billion as compared with $90.7 billion for the same period in 2018. This, too, is expected to have aided portfolio growth in the company’s residential lending segment.

Further, the Zacks Consensus Estimate for the third-quarter revenues of $332.1 million reflects year-over-year (y/y) growth of 16.2%.

A significant portion of Starwood Property’s credit real estate (CRE) loan portfolio and infrastructure loan portfolio is indexed to LIBOR. Nonetheless, LIBOR floors are expected to cushion the company’s third-quarter net interest income against the decline in LIBOR rates during the quarter. However, lower LIBOR is expected to have weighed on the company’s asset yields.

Prior to the third-quarter earnings release, there is lack of any solid catalyst for becoming overtly optimistic about the company’s business activities and prospects. As such, the Zacks Consensus Estimate for the July-September quarter’s earnings remained unrevised at 52 cents. Further, it represents y/y decline of 2%.

Key Developments During Q3

Continuing with its efforts to transition the company’s portfolio financing from traditional lines to funding options that reduce the impact of market volatility, Starwood Property closed its first CRE collateralized loan obligation (CLO), amounting $1.1 billion, during the quarter under review. The CLO has the lowest cost of funds in the sector and accretively finances 21 loans. In addition, it has a two-year reinvestment period.

Earnings Whispers

Our proven model does not conclusively predict an earnings beat for Starwood Property this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here.

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 3 (Hold).

Stocks to Consider

AGNC Investment Corp.’s (NASDAQ:AGNC) earnings estimate for 2019 has been revised 2% upward to $2, over the past seven days. It currently sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Great Ajax Corp’s (NYSE:AJX) current-year earnings moved 4.8% north to $1.73 over the past 30 days. It carries a Zacks Rank of 2, at present.

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