In order for investors to appreciate the opportunity that the new Starwood Waypoint Realty Trust (NYSE: SWAY) represents, I feel it would be helpful to first look at the brief history of this new institutional asset class. One of these pioneers has a business model that has crushed the market.
I have been following the single-family home rental sector since the beginning. The first REITs: Silver Bay Realty Trust (NYSE: SBY), American Residential Properties (NYSE: ARPI), and Altisource Residential Corp. (RESI) all went public a little over a year ago. They got off to a slow start, each raising between $100 million to $300 million in IPO proceeds. These are still relatively small REITs with current market caps of $617 million, $590 million, and $747 million, respectively.
So far, Wall St. hasn't been all that impressed with the initial results of Silver Bay and American Residential which primarily purchase homes to renovate, lease, and manage. They currently trade below their IPO prices and net asset value, or NAV.
Much larger rival American Homes 4 Rent (AMH 0.07%) has fared better -- likely due to scale and better access to financial markets for continued growth. American Homes owns over 20,000 single-family homes and sports a market cap of $2.8 billion. After American Homes went public, and reported earnings for the quarter ending Sept. 30, 2013, it became clear how a larger scale operation can make a big difference in profitability.
Blackstone Group's privately held Invitation Homes is by far the largest single-family landlord. Blackstone owns over 40,000 single-family homes valued around $8 billion. Blackstone executives have shared that access to capital will be a key to long-term success for institutional single-family landlords.
Hitting it out of the park
Altisource has an entirely different approach -- the stock is up over 50% the past year, and it just announced a 60% dividend increase, currently yielding 5.4%. This REIT primarily buys residential mortgage portfolios of non-performing loans, or NPL's, and has many options to monetize them: loan modification, deed for lease, liquidation/short sale, or REO rental.
Altisource is part of the Ocwen Financial family of companies controlled by Mr. William Erby. Ocwen is currently under investigation by the New York Department of Financial Services. Since Altisource buys delinquent loans -- many from Ocwen and related entities -- this could become a risk moving forward. After a very impressive two-year run, Ocwen stock is down over 30% since the beginning of this year.
The best of both worlds
Privately owned Starwood Capital Group understands how to finance real estate on a global scale. It currently has over $32 billion of assets under management. They are the external manager for Starwood Property Trust, (STWD 1.21%) a $4 billion market cap diversified REIT with a primary focus on real estate backed securities. It is currently paying investors an 8% dividend yield.
On Feb. 3, 2014 Starwood Property Trust spun out its single family residential assets into Starwood Waypoint Residential Trust – a merger with Waypoint Homes. Waypoint is a privately held company that has acquired, leased and managed over 8,000 homes since 2009. This brought together sponsor Starwood Capital Group's horsepower and expertise in real estate finance with the Waypoint Homes vertically integrated operational platform. At first glance, $1.1 billion market cap Starwood Waypoint may seem just like another competitor in this space. However, when you look closer, they seem to have all of the bases covered:
· A strong balance sheet. Starwood Capital CEO Barry Sternlicht spun out a healthy public company poised for growth: almost $1 billion of assets; $100 million in cash; and arranged for a $500 million credit facility.
· Scale right out of the starting gate. 5,049 homes at a $707 million basis; $220 million cost basis of NPL's backed by 1,736 homes.
· A Waypoint acquisition funnel. Waypoint owns an additional 4,962 homes. On March 4, 2014 Starwood Waypoint announced the acquisition of 707 of these homes for $144 million. These homes were 91% leased and provide immediate cash flow.
· Multiple acquisition channels for profitable growth. Starwood Waypoint is willing to grow by purchasing: homes, NPL's, or bolt-on acquisitions – depending upon the best risk/return for shareholders.
· A technology advantage. The proprietary Waypoint cloud-based Compass software platform has evolved over five years and provides real-time information on: acquisitions, construction, leasing, management, and repairs.
Investor takeaway
It is way too early in the game to SWAY the judges to award a medal to Starwood Waypoint. However, this spin-off has a solid balance sheet and a multi-channel strategy for accretive long-term growth. I am looking forward to the first earnings report and conference call to learn more about funds from operation guidance and future dividend announcements. This is a company that merits putting on your watch list. I am impressed!
