Starwood to Spin Off Home-Rental Division Into New REIT

Starwood Property Trust Inc. (STWD), a real estate investment trust with access to capital, lacked in-house management for its single-family rental homes. Waypoint Real Estate Group, one of the first large rental-house investors, was stymied this year when it tried raise money by going public. Now the two companies are getting together.

“They have the operating engine for us to reach our objectives,” Starwood Property Chief Executive Officer Barry Sternlicht said in a telephone interview. “With Waypoint, we’ll have best-in-class management that has capability proven to get to scale.”

Starwood Property will spin off its single-family rental unit into a REIT headed by Waypoint’s management division, which is being acquired in the deal. The new company, Starwood Waypoint Residential Trust, held $750 million in 4,268 homes and nonperforming loans on 1,549 properties as of Sept. 30, Starwood Property said in a statement yesterday.

Wall Street-backed investors have been racing to buy houses as prices, which fell as much as 35 percent from their 2006 peak, are rising at their fastest pace in seven years. Demand for rental homes is growing from millions of households that went through foreclosure or can’t qualify for a mortgage.

The new REIT will receive $100 million in cash from its parent, a $400 million line of credit and no debt, which will position it to be the second-largest publicly traded single-family rental REIT by portfolio value, Sternlicht said.

‘Moby-Dick’

“We’re buying $50 million to $60 million homes a month and the baby is getting a little large -- like Moby-Dick,” he said in the interview yesterday.

Sternlicht, 52, will be chairman of the new company, which he expects to begin trading publicly on the New York Stock Exchange under the ticker SWAY in February. Gary Beasley and Doug Brien, Waypoint’s current co-CEOs, will hold the same titles at the Starwood Waypoint.

The spinoff will benefit Starwood Property, because it sharpens the company’s focus on commercial real estate, according to Daniel Altscher, an analyst with FBR Capital Markets & Co. who has an outperform rating on the REIT’s shares.

“This is a great transaction for Starwood shareholders,” he wrote in a note to investors today.

Starwood Property rose 2.2 percent to $26.25, a five-month high, at the close in New York.

Distressed Properties

Sternlicht, whose Greenwich, Connecticut-based Starwood Capital Group has $26.3 billion under management, began investing in distressed real estate after the 1980s savings-and-loan crisis. Starwood Property is managed by a Starwood Capital affiliate.

Waypoint, an Oakland, California-based landlord with about 5,000 properties, filed for an initial public offering as a REIT in May, just as investor interest in housing-related stocks suffered following a spike in mortgage rates. The new company is a way for Waypoint to go public using Starwood’s strength as a source for capital, Beasley said.

“We’ve always wanted to find a way to build a big platform,” he said in a telephone interview. “Really, the only thing that’s been missing for us is capital.”

Beasley and Sternlicht declined to say how much Starwood paid for Waypoint. Waypoint will continue to manage its properties, which are owned by 11 different funds, after the acquisition, Beasley said.

Shares Decline

Shares of three publicly traded single-family rental REITs -- American Homes 4 Rent, the largest publicly traded house REIT with 20,000 homes, American Residential Properties Inc. and Silver Bay Realty Trust Corp. -- are trading below their initial prices.

“Our bet here is that the public market is wrong,” Sternlicht said. “Long-term we can create in-scale, lasting assets in the public market that will pay a current yield higher than those of other REITs and will have home price appreciation at least equivalent to that in other commercial real estate.”

Private-equity firms, hedge funds and REITs have raised more than $20 billion in the past two years to acquire as many as 200,000 rental homes. Blackstone Group LP (BX), the largest landlord with about $7.5 billion spent on 40,000 houses, started shopping the first-ever U.S. bonds backed by rental homes to investors this week.

Waypoint started in 2009 and developed software and management that made it attractive to Starwood, according to Sternlicht. The landlord has “techno wizards” who have developed systems to value properties being considered for acquisition and manage them more efficiently than Starwood’s current set-up, which relies on outside companies, he said.

“I knew to go to Florida and I knew more or less where we wanted to go,” Sternlicht said. Waypoint “can tell me what street I should buy in Orlando.”

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.