Could Altisource Residential's Success Lead to Huge Returns for This Starwood Capital Spin-Off?

A ground floor opportunity with a solid foundation for growth.

Mar 13, 2014 at 5:01PM

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. (NYSE: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.

SBY Total Return Price Chart

Much larger rival American Homes 4 Rent (NYSE:AMH) 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, (NYSE:STWD) 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!

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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