However, despite both companies being mortgage real estate investment trusts, they are quite different. Therefore, to determine which stock will ultimately be the better performer, I'll dig into the two most of the most important aspects of any business: opportunity and management.
At $9.8 trillion, mortgages are an enormous market and represent 75% of all outstanding consumer debt in the U.S as of March 2014. Combined with its manager PennyMac Financial Services, it is the the eighth-largest originator of loans, and PennyMac Mortgage is primed to take advantage of this market.
By using its established pipeline of mortgage lenders, PennyMac Mortgage acquires loans, packs them into securities, and sells them for a profit. Equally important, it maintains the rights to service the loans and earn fees to ensure mortgage payments get from borrower to lender.
Rather than investing in residential debt, Starwood Property primarily makes loans to businesses for purchasing commercial property. Banks focus on longer-term loans on stable assets, leaving an incredible niche for Starwood Property. The company focuses on offering shorter-term loans (five to 10 years) to businesses buying property in need of improvements or construction.
As the country's largest commercial mortgage REIT, Starwood Property has a strong market position, a diverse array of commercial assets, and a 450-member team that allows the company to invest across the U.S. and in parts of Europe.
While both companies having more than their fair share of opportunities, it takes a strong management team to turn opportunity into reality.
"We slightly screwed up the closings ... and usually, we're better than this. This was a bad quarter," said Barry Sternlicht, CEO of Starwood Property Trust, during the company's second-quarter call.
In the second quarter of this year, Starwood Property issued new shares to fund an investment. Because the loan was delayed and not all the raised capital went to good use, it ended up costing investors about $0.05 a share.
The fact is that every company screws up at least occasionally. If you don't hear about it, the company simply isn't telling you. In a business that relies so heavily on management as mortgage REITs, it is especially important that investors identify CEOs they can trust.
By admitting his mistakes investors know Sternlicht will be open about operations. He passed on the high profile acquisition of net-lease REIT CapLease because he believed it wouldn't benefit the company's dividend. Starwood Property operates with less debt than peers because it provides better protection from risk, and as the founder Starwood Hotels, Sternlict's track record speaks for itself. Ultimately, Starwood Property CEO Sternlict actions look to be in the best interest of shareholders, and that's exactly what investors should be searching for.
PennyMac Mortgage has a very different story.
Over the past five years, Bank of America has paid billions of dollars to settle lawsuits for predatory lending practices associated with Countrywide Financial, which Bank of America acquired during the financial crisis.
PennyMac CEO Stanford Kurland held a number of high-ranking executive positions at Countrywide from 1979 to 2006; leaving right before the housing bubble burst. As housing prices started plummeted in 2007, homeowners that had been pushed into over-sized loans or loans with ballooning interest rates by Countrywide and others owed more on their mortgage than their homes were worth. This was followed by high numbers of defaults and the eventual bottoming of the economy in 2009.
With the U.S. economy in utter wreckage, and banks desperately trying to dispose of their defaulting loans, Kurland founded PennyMac in May of 2009. The company began buying these distress loans for pennies on the dollar, and since they bought the mortgages for dirt cheap they were able to renegotiate mortgages to get homeowners out of default. The company would go on to make a killing when the housing market took a turn for the better in 2012.
To be clear, Kurland's role at Countrywide is not a reason to dismiss PennyMac Mortgage as an investment. In fact, for many people he's the hero that was fired from Countrywide for his contrary beliefs and went on to save people from losing their homes. Ask someone else, and he's the ultimate villain. An arsonist that made a fortune burning down our economy and selling off the rubble.
Maybe they're both right. But, for me, I believe the beauty of the market is that there are so many opportunities there is no reason to settle for management you aren't sure about. Ultimately, investing in a company that has opportunity is essential, but finding a management team I can stand behind is the most important thing. For that reason, I think Starwood Property is the better dividend stock and your better buy today.