Starwood Property Trust, Inc. (NYSE:STWD) operates as one of the largest commercial mortgage REITs, both buying existing commercial mortgages and originating its own commercial loans. It’s been over three years since the company commenced operations, and since then Starwood has carved out a dominant position in the REITs sector for itself, providing attractive dividend yields and potential for growth. The $3.4 billion market cap company was initially built to take advantage of a multi-trillion dollar commercial lending market where many of the players have restricted their commercial real estate lending.

Recent Performance

During the third quarter of 2012, the company invested $599 million in originations and acquisitions of new investments, bringing the total gross capital deployed since inception to $5.7 billion. As of November, the company had around $400 million of loans and investments in various stages of due diligence that are expected to be closed during the fourth quarter of 2012. The company is expected to disclose the performance of its fourth quarter on Feb. 24.

During the third quarter of the prior year, Starwood reported a bottom line of $0.43 per share, around 170% above the bottom line of the same quarter of the previous year. In comparison, PennyMac Mortgage Investment Trust (NYSE:PMT), which invests and originates residential mortgages, reported an 11% surge in its bottom line. Starwood reported net interest margin of $60.8 million, up 20% from a year ago, while PennyMac’s comparable net investment income surged 137% over the same time period. For Starwood, the increase in net interest margin was a result of 168% improvement in interest income from mortgage backed securities and an 8% improvement in interest income from loans, partially offset by a 65% rise in interest expense.

In contrast, Crexus Investment Corp (NYSE:CXS), which is another commercial mortgage REIT with a market cap of $23 billion, reported a 44% decline in its bottom line, while the net interest margin declined 40% from a year ago.

How Starwood Becomes Better

The company announced on Jan. 24 the acquisition of LNR Property LCC for $1.05 billion cash. LNR Property has several commercial real estate related businesses. It stands to be the largest special servicer of distressed commercial property debt, owning a loan portfolio of $130 billion. Along with owning large amounts of commercial MBS and CDOs, the company also originates commercial mortgage loans and securitizes them into CMBS. It has established its commercial mortgage servicing business in Europe and owns a 50% share in Auction.com.