Joining The $SWAY! Starwood Waypoint Trust To Merge With Colony American Homes

Betting on distressed residential real estate became extraordinarily popular post-crisis and the space even attracted some big money names including Blackstone (BX) and Colony Capital (CLNY). Barry Sternlicht’s Starwood Property Trust (STWD) was another entrant and in early 2014 the company spun off its single family residential real estate assets into the Starwood Waypoint Residential Trust (SWAY). The macro trends have been favorable for the companies as rents continue to rise and fewer people buy homes. In a bet that those trends will continue, SWAY will merge with fellow operator Colony American Homes and create a company with a massive portfolio of over 30K homes worth close to $8b. Colony shareholders will receive 65m shares of SWAY, valuing the privately held company at ~$1.5b. The new company will be majority owned by Colony investors (59% to 41%) and the combined entity is expected to maintain SWAY’s current dividend payment.

Despite the favorable macro situation, Starwood Waypoint’s stock is actually about 10% below where it began trading post-spin. Looking ahead, there are doubts about the viability of the business if homeownership rates rebound and whether or not these companies can continue to grow their inventory, especially now that prices have rebounded from the depths of the crisis. This WSJ piece also raises additional concerns about whether or not rents can continue to increase in the face of increasing supply and loosening mortgage standard. Additionally, there are concerns about these company’s ability to manage and maintain their portfolios of properties although Starwood did bring in the highly respected Waypoint Group to handle those duties.Consolidation can help here and the combination is expected to generate ~$40-50m in synergies.

The new company will be led by Colony American’s current President, Fred Tuomi, who will assuke the CEO title of the joint company and SWAY’s current CEO, Doug Brien, will become President & COO. Barry Sternlicht and Thomas Barrack will both serve as non-executive chairman. The transaction is expected to close sometime during the first quarter of 2016, but is subject to a shareholder vote.

Disclosure: Author holds no position in any stock mentioned