The new company plans to aggressively acquire new properties at ‘distressed prices’ (via purchase or through their non performing loans) and hopes to make a good return via rental income or increased property prices. Geographically, the portfolio is currently focused on Texas and Florida, but the company expects to expand its scope to other states such as Arizona, California, Colorado, Georgia, Illinois, Nevada and North Carolina. Currently, the unit generates roughly $9m in revenue and an operating loss of close to $20m, but I am not sure how meaningful those numbers really are. According to a recent presentation, as of November 30th the company’s portfolio consisted of approximately 6,785 units of single-family homes and NPLs, with a cost basis of ~$927m. The presentation breaks it out further as consisting of 3/4 homes and 1/4 NPLs and represents a nice increase from the 5,817 units at the end of September. STWD will contribute $100m of cash to SWAY and the new company is in the process of securing a large line of credit (>$400m) to fund both operations and expansion so it should have plenty of capital available to put to work. As a REIT it will be paying out nearly all of its income (if it ever starts to generate any).
The presentation spends a lot of time walking through the strategy and explaining the possible upside so it’s worth a read. As always, the company’s Form 10 filing is also full of relevant information on the company and market opportunity. It even spends time going through the real estate situation in many of its target markets.
Mr. Sternlicht, Chairman & CEO of the Starwood Capital Group, will serve as Chairman of SWAY which is the same position he holds at STWD. Gary Beasley and Doug Brien, Waypoint Real Estate Group’s current co-Chief Executive Officers, will hold the same titles at SWAY while Waypoint’s current CIO, Colin Wiel, will serve as SWAY’s CIO.
The new company will be managed by SWAY Management which will merge with Waypoint Real Estate Group as part of this transaction. SWAY Management is a part of the Starwood Capital Group. According to the presentation, the new company will pay them a management fee of ~1.5% on an annual basis and also grant them a nice amount of RSU’s post-spin. From the Form 10:
Concurrently with the completion of the separation, we will grant (1) our Manager 747,757 restricted share units, (2) an aggregate of 229,808 of our restricted share units to certain employees of our Manager, based on an assumed fair market value of $26.11 per our common share on the distribution date, which is calculated as described in “Principal Shareholders—Note on Grants to Our Non-Executive Trustees and Certain Employees of Our Manager,” and (3) an aggregate of 9,575 of our restricted common shares to our non-executive trustees, based on an assumed fair market value of $26.11 per our common share on the distribution date, which is calculated as described in “Principal Shareholders—Note on Grants to Our Non-Executive Trustees and Certain Employees of Our Manager.”
Waypoint has a strong operating background in the space and a great track record. Interestingly, its legacy funds will not be included in the deal so some of the key members of the management team will have other items on their plates. This isn’t the only possible conflict of interest and lack of focus arising from the creation of this new company. Not typical for a spin which usually involves dedicated management focus. In fact, all of the members of the company’s management team also hold senior positions at the management company. As a result, they may not always have the company’s best interests in mind, especially when negotiating with their other entities. As part of the arrangement, the company’s manager and Starwood Capital Group agreed to some non-compete measures for so long ‘as the management agreement is in effect’ and the ‘Manager and Starwood Capital Group are under common control.’
According to Mr. Sternlicht, it was time for a spin because “Starwood Property Trust’s investment in the sector has now reached critical mass. It has become a distinct business separate from our core lending platform, more closely resembling an equity play.’ Laying out the case further, he added:
With Waypoint’s best-in-class management team and deeply experienced operating platform, we are positioned to grow Starwood Waypoint Residential Trust, effectively manage our growing NPL operation and maximize the value of our single-family residential investments in the coming years. Together with Waypoint, we expect to create a portfolio focused on markets where scale, current yield and home price appreciation should provide our shareholders with a very attractive total rate of return that we believe is at least as compelling as returns available in other major real estate asset classes. In addition, Starwood Property Trust expects to maintain its current dividend to its shareholders and to continue to deploy capital in a large pipeline of investment opportunities.
Makes sense conceptually, but we shall see how it plays out. STWD shareholders will receive 1 share of SWAY for every 5 shares of STWD owned. The spinoff is expected to take place on January 31st to shareholders as of January 24th, but a ‘When Issued’ market should already be in place as of January 22nd. The spin will NOT be tax-free and instead the transaction will be taxed as a special dividend, so I suggest one consult his or her tax experts for more information.
There is a lot of work that can be done on this, but basically this is a bet on an improving residential real estate market. The company did provide an estimate of Book Value Per Share (as of January 21st) for the new company of $26.47 so that might be a good place to start. One of the interesting phenomenons of the recent crash has been the entry of institutional players such as Blackstone (BX) into the residential real estate market. You even have entire towns controlled by hedge funds. If you are going to be playing the space, it’s nice to be betting on a seasoned pro with an amazing track record like Barry Sternlicht. Of course that doesn’t mean there aren’t numerous risks involved such as the conflicts of interest or general real estate market issues. Problems can become very tricky when leverage is involved, although one of the nice things about real estate is that you can dig in to the geographies and get a better feel for the opportunity on a very granular level.
It’s also worth noting that this isn’t Mr. Sternlicht’s only recent bet on a housing market recovery. Just a few months ago, TRI Pointe Homes (TPH), a homebuilder backed by Mr. Sternlicht, announced that it would acquire Weyerhauser’s (WY) much larger home builder business. As a result of the transaction, TRI Pointe is now one of the top 20 home builders in the US.
Disclosure: Author holds no position in any stock mentioned.
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- Starwood Property Trust Sets Record Date And Distribution Date For Spin-off Of Starwood Waypoint Residential Trust (sacbee.com)
