August 11, 2015 - 7:32pm EST by
2015 2016
Price: 27.76 EPS 1.75 2
Shares Out. (in M): 38 P/E 16 14
Market Cap (in $M): 979 P/FCF 0 0
Net Debt (in $M): 2,000 EBIT 0 0
TEV (in $M): 2,979 TEV/EBIT 0 0

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Investment Summary


Imagine if you could go back in time to the bottom of the housing market in 2012 and buy homes at those prices. Now imagine you didn’t have to time travel, but instead you had the knowledge of what has happened the last three years and were being offered those prices today in 2015, and imagine you were able to buy those homes professionally managed, stabilized and cash flowing in an environment with little available inventory, growing demand and limited increased supply on the horizon. Sounds a little too good to be true, right?

This is what you are being offered in the public markets right now in one of the best run publicly traded, single-family rental companies, Starwood Waypoint (NYSE: SWAY).

Right now, SWAY trades at 27% discount its net asset value of almost $35 per share, or the equivalent of buying homes at 2012 prices. And this NAV has grown over 9% year over year and is poised to easily grow 5% annually in the next 2-3 years. SWAY could be worth more than $40 per share in 2-3 years, compared to its current price of $25.50 per share, as its value grows and it trades more in line to its NAV.

The best part of the SWAY story is that there is little downside at current prices with the company selling below book value of $27.9 per share, paying a decent (and soon to be growing) dividend of 3% and a balance sheet that is well capitalized.

Over $10 billion of investor money has flowed into the housing sector in the last 3-4 years to buy homes at prices that many thought were once in a lifetime opportunities. And now we get to invest at once-in-a-lifetime prices as those investors did 3 years ago with little future operational risk, platform risk, technology risk or capitalization risk. This is one of the best risk/reward investment opportunities that exist in the stock market right now.


State of the Housing Market


The Case Shiller home price index of the top 20 cities in the U.S. bottomed in March of 2012 at 134.07 and currently stands at 179.03. The broad recovery is very clear no matter what housing index you look at:



During the bubble in 2004-2006, easy credit was the real driver of home prices; everyone could qualify for a loan at any home price. What is powering home prices now is very different; and it is a shortage of homes driven by a lack of new housing stock. We have not been building enough new houses.

Historically, we have never built this few homes on a national basis for this long.

Let’s look at it another way, residential investment as a percent of GDP:



The U.S. is investing too little in housing, as this data, which goes back to 1947 shows. We still have not recovered to the previous record low in over 6 years. We are in uncharted territory. But to get more granular, let’s isolate the data to just look at single-family homes.


While multifamily hums along and has recovered to normal levels as a percentage of GDP, single-family homes is just approaching the 1982 low and would have to double from current levels to get back to the 50 year average.

The other remarkable trait of this housing market is that new home sales have suffered and barely recovered, but existing homes have recovered to normal levels. Economists call this the “distressing gap.” There were so many foreclosures and prices suffered so much that it did not make sense to buy a new home, when you could get an existing home for such a discount.



We can see that the foreclosure rates of not only the hardest hit areas have returned to pre-crisis levels, but also the national foreclosure rate is now back to 2007 levels. The foreclosure wave has simply passed and there is no great shadow supply of homes to satisfy demand in the market.


People, scarred from the financial crisis and unable to financially qualify for a loan, are not buying homes as evidenced by new home sales data and the homeownership rate. But if they aren’t buying, what are they doing?