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SWAY > SEC Filings for SWAY > Form 10-Q on 14-Aug-2014All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


We are a Maryland real estate investment trust formed primarily to acquire, renovate, lease and manage residential assets in select markets throughout the United States. Our primary strategy is to acquire homes through a variety of channels, renovate these homes to the extent necessary and lease them to qualified residents. We seek to take advantage of continuing dislocations in the housing market and the macroeconomic trends in favor of leasing homes by acquiring, owning, renovating and managing homes that we believe will
(1) generate substantial current rental revenue, which will grow over time, and
(2) appreciate in value as the housing market continues to recover over the next several years. In addition to the direct acquisition of homes, we purchase pools of NPLs at significant discounts to their most recent BPO, which we may seek to
(1) convert into homes through the foreclosure or other resolution process that can then either be contributed to our rental portfolio or sold or (2) modify and hold or resell at higher prices if circumstances warrant. Our objective is to generate attractive risk-adjusted returns for our shareholders over the long-term, through dividends and capital appreciation.

We were organized as a Maryland corporation in May 2012 as a wholly-owned subsidiary of SPT. Subsequently, we changed our corporate form from a Maryland corporation to a Maryland real estate investment trust and our name from Starwood Residential Properties, Inc. to Starwood Waypoint Residential Trust. We were formed by SPT to own single-family rentals and NPLs. On the Distribution Date, SPT completed the Separation of us to its stockholders.

Our OP was formed as a Delaware limited partnership in May 2012. Our wholly-owned subsidiary is the sole general partner of our OP, and we conduct substantially all of our business through our OP. We own 100% of the OP units in our OP.

We intend to elect and qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ending December 31, 2014. We generally will not be subject to U.S. federal income taxes on our REIT taxable income to the extent that we annually distribute all of our REIT taxable income to shareholders and qualify and maintain our qualification as a REIT.

Prior to the Separation, the historical financial statements were derived from the condensed consolidated financial statements and accounting records of SPT principally representing the single-family segment, using the historical results of operations and historical basis of assets and liabilities of our businesses. The historical financial statements also include allocations of certain of SPT's general corporate expenses. Management believes the assumptions and methodologies underlying the allocation of general corporate expenses to the historical results of operations were reasonable. However, such expenses may not be indicative of the actual level of expenses that would have been incurred by us if we had operated as an independent, publicly traded company or of the costs expected to be incurred in the future. As such, the results of operations prior to the Separation, included herein, may not necessarily reflect our results of operations, financial position or cash flows in the future or what our results of operations, financial position or cash flows would have been had we been an independent, publicly traded company during the historical periods presented. Transactions between the single-family business segment and other SPT businesses have been identified in the historical financial statements as transactions between related parties for periods prior to the Separation.

Our Manager

We are externally managed and advised by our Manager pursuant to the terms of the Management Agreement. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded and controlled by Barry Sternlicht, our chairman. Starwood Capital Group has invested in most major classes of real estate, directly and indirectly, through operating companies, portfolios of properties and single assets, including multi-family, office, retail, hotel, residential entitled land and communities, senior housing, mixed use and golf courses. Starwood Capital Group invests at different levels of the capital structure, including equity, preferred equity, mezzanine debt and senior debt, depending on the asset risk profile and return expectation.

On the Distribution Date, our Manager acquired the Waypoint platform, which is an advanced, technology driven operating platform that provides the backbone for deal sourcing, property underwriting, acquisitions, asset protection, renovations, marketing and leasing, repairs and maintenance, portfolio reporting and property management of homes.

Our Portfolio

As of June 30, 2014, our portfolio consisted of 12,600 owned homes and homes underlying NPLs, including (1) 9,407 homes and (2) 3,193 homes underlying 3,357 NPLs, of which 277 NPLs represent second, third, and unsecured liens. The 3,080 of first lien NPLs have an unpaid principal balance ("UPB") of $681.7 million, a total purchase price of $397.0 million and total estimated BPO value of $635.3 million that are secured by liens on 2,920 homes and 160 parcels of land. As of June 30, 2014, our homes that were rent ready for more than 90 days were approximately 98.8% leased, and our homes that were owned by us for 180 days or longer were approximately 94.9% leased.

Table of Contents

As of June 30, 2014, we had executed agreements to purchase properties in 434 separate transactions for an aggregate purchase price of $70.0 million. There can be no assurance that we will close on all of the homes we have contracted to acquire.

Subsequent Acquisition of Homes and NPLs

Subsequent to June 30, 2014, we have continued to purchase homes and NPLs. For the period from July 1, 2014 through July 31, 2014, and as of July 31, 2014, we had acquired an aggregate of 306 additional homes with an aggregate acquisition cost of approximately $44.8 million. Subsequent to June 30, 2014, we purchased two separate pools of NPLs for an aggregate acquisition cost of $218.7 million. The total pools include 1,294 NPLs and 146 SFR homes.


The following table provides a summary of our portfolio of single-family rentals
as of June 30, 2014:

                                                                      Average                                                 Home        Weighted         Average
                                       Number                       Acquisition         Average            Aggregate          Size        Average       Monthly Rent
                                         of          Percent           Cost            Investment         Investment        (Square         Age          Per Leased
Markets                               Homes (1)       Leased         Per Home         Per Home (2)       (In millions)       feet)        (Years)          Home(3)
Atlanta                                    2,299         71.1 %    $      95,551     $      117,265     $         269.6        1,909             22     $       1,155
South Florida                              1,749         82.1 %    $     133,741     $      158,740               277.7        1,588             44     $       1,557
Houston                                    1,149         79.5 %    $     126,273     $      140,974               162.0        2,060             28     $       1,489
Tampa                                        972         83.2 %    $     106,884     $      124,699               121.2        1,476             40     $       1,250
Dallas                                       915         70.5 %    $     127,312     $      146,091               133.7        2,050             22     $       1,457
Chicago                                      455         76.0 %    $     121,385     $      148,162                67.4        1,555             41     $       1,662
Denver                                       341         63.9 %    $     183,932     $      212,859                72.6        1,512             31     $       1,708
Southern California                          340         82.9 %    $     235,913     $      247,210                84.1        1,617             36     $       1,791
Orlando                                      327         83.8 %    $     118,158     $      137,110                44.8        1,644             37     $       1,295
Phoenix                                      248         83.9 %    $     140,329     $      158,213                39.2        1,543             39     $       1,190
Northern California                          244         89.3 %    $     216,462     $      230,903                56.3        1,494             45     $       1,727
Las Vegas                                     42         95.2 %    $     155,717     $      167,481                 7.0        1,966             27     $       1,296
California Valley                             41        100.0 %    $     226,226     $      227,085                 9.3        1,728             25     $       1,612

Total / Average                            9,122         77.5 %    $     127,087     $      147,434     $       1,344.9        1,760             32     $       1,416

(1) Excludes 285 homes that we do not intend to hold for the long-term.

(2) Includes acquisition costs and actual and estimated upfront renovation costs. Actual renovation costs may exceed estimated renovation costs, and we may acquire homes in the future with different characteristics that result in higher renovation costs.

(3) Represents average monthly contractual cash rent. Average monthly cash rent is presented before rent concession and Waypoints. To date, rent concessions and Waypoints have been utilized on a limited basis and have not had a significant impact on our average monthly rent. If the use of rent concessions and Waypoints or other leasing incentives increases in the future, they may have a greater impact by reducing the average monthly rent we receive from leased homes.

Table of Contents

The following table provides a summary of our leasing as of June 30, 2014:

                                                            Homes 90 Days Past Rent Ready                          Homes Owned 180 Days or Longer
                                                                                       Average                                                 Average
                                    Total                                              Monthly                                                 Monthly
                                  Number of        Number of         Percent           Rent per           Number of         Percent            Rent per
Markets                           Homes(1)           Homes           Leased         Leased Home(2)          Homes            Leased         Leased Home(2)
Atlanta                                2,299            1,292          97.6 %      $          1,140            1,213           93.0 %      $          1,138
South Florida                          1,749            1,143          99.4 %      $          1,552            1,430           94.0 %      $          1,553
Houston                                1,149              759          99.1 %      $          1,478              823           94.5 %      $          1,470
Tampa                                    972              573          99.1 %      $          1,229              654           95.2 %      $          1,218
Dallas                                   915              481          99.6 %      $          1,436              484           96.7 %      $          1,422
Chicago                                  455              278          97.8 %      $          1,653              261           95.0 %      $          1,651
Denver                                   341              149          99.3 %      $          1,700              161           97.5 %      $          1,704
Southern California                      340              230          96.5 %      $          1,799              231           95.7 %      $          1,814
Orlando                                  327              199         100.0 %      $          1,308              222           98.6 %      $          1,314
Phoenix                                  248              176         100.0 %      $          1,181              152           97.4 %      $          1,186
Northern California                      244              192         100.0 %      $          1,714              195           97.9 %      $          1,706
Las Vegas                                 42               36         100.0 %      $          1,309               42           95.2 %      $          1,296
California Valley                         41               37         100.0 %      $          1,589               41          100.0 %      $          1,612

Total/Average                          9,122            5,545          98.8 %      $          1,406            5,909           94.9 %      $          1,413

(1) Excludes 285 homes that we do not intend to hold for the long-term.

(2) Represents average monthly contractual cash rent. Average monthly cash rent is presented before rent concession and Waypoints. To date, rent concessions and Waypoints have been utilized on a limited basis and have not had a significant impact on our average monthly rent. If the use of rent concessions and Waypoints or other leasing incentives increases in the future, they may have a greater impact by reducing the average monthly rent we receive from leased homes.

NPL Portfolio

The following table summarizes our NPL portfolio as of June 30, 2014:

                                                                                                                                                                      Rental Pool
                                                                                             Total Loans                                                              Assets (4)
                                                                 Total                                                                                                       Percent
                                                               Purchase          Total           Total                         Purchase          Purchase                    of Total
                                                                 Price            UPB             BPO         Weighted        Price as a        Price as a                    Loans
                                               Loan               (in             (in             (in          Average        percentage        percentage        Loan         Per
State                                      Count(1), (2)       millions)       millions)       millions)       LTV (3)          of UPB            of BPO         Count       Location
Florida                                               762     $      94.4     $     187.5     $     149.0        152.9  %           50.3  %           63.3  %       423          49.0  %
Illinois                                              373            47.8            76.0            74.3        141.0  %           62.8  %           64.3  %       257          29.7  %
Arizona                                               230            19.9            33.8            29.4        198.0  %           58.7  %           67.5  %        13           1.5  %
Wisconsin                                             207            17.4            24.2            27.7        114.0  %           71.6  %           62.8  %        -             -   %
New York                                              165            32.6            62.8            64.6        114.0  %           51.8  %           50.4  %        -             -   %
California                                            148            42.9            60.8            68.6        100.4  %           70.6  %           62.6  %        95          11.0  %
Indiana                                               152            10.8            15.1            17.1        109.8  %           71.9  %           63.5  %        -             -   %
New Jersey                                            144            20.7            44.0            37.7        141.6  %           47.2  %           54.9  %        -             -   %
Maryland                                              100            17.9            31.3            26.6        132.3  %           57.1  %           67.1  %        -             -   %
Pennsylvania                                           74             6.9            11.7            10.5        137.7  %           58.8  %           65.2  %        -             -   %
Georgia                                                65             8.0            13.2            12.2        131.0  %           60.8  %           66.0  %        41           4.7  %
Other                                                 660            77.7           121.3           117.6        124.4  %           64.1  %           66.0  %        35           4.1  %

Total / Average                                     3,080     $     397.0     $     681.7     $     635.3        135.8  %           58.2  %           62.5  %       864           100  %

(1) Represents first liens on 2,920 homes and 160 parcels of land.

(2) Excludes 277 unsecured, second, and third liens with an aggregate purchase price of $1.9 million.

(3) Weighted average loan-to-value ("LTV") is based on the ratio of UPB to BPO weighted by UPB for each state as of the respective acquisition dates

(4) See Note 1 - Organization and Operations for the definition of Rental Pool Assets.

Table of Contents

Factors That May Influence Future Results of Operations

Our results of operations and financial condition are affected by numerous factors, many of which are beyond our control. The key factors we expect to impact our results of operations and financial condition include our pace of acquisitions and ability to deploy our capital, the time and cost required to stabilize a newly acquired home, rental rates, occupancy levels, rates of resident turnover, our expense ratios and capital structure.


We continue to grow our portfolio of homes. Our ability to identify and acquire homes that meet our investment criteria may be affected by home prices in our target markets, the inventory of homes available through our acquisition channels and competition for our target assets. We have accumulated a substantial amount of recent data on acquisition costs, renovation costs and time frames for the conversion of homes to rental. We utilize the acquisition process developed by the members of the Waypoint executive team who employ both top-down and bottom-up analyses to underwrite each acquisition opportunity we consider. The underwriting process is supported by our highly scalable technology platform, referred to as Compass, market analytics and a local, cross-functional team. In acquiring new homes, we rely on the expertise of our Manager to acquire our portfolio and will monitor the pace and source of these purchases.

Our operating results depend on sourcing NPLs. As a result of the economic crisis in 2008 that continues through today, we believe that there is currently a large supply of NPLs available to us for acquisition. Properties that are either in foreclosure and have not yet been sold or homes that owners are delaying putting on the market until prices improved are known as shadow inventory. We believe the available amount of shadow inventory provides for a significant acquisition pipeline of assets since we plan on targeting just a small percentage of the population. We further believe that we will be able to purchase NPLs at lower prices than SFR because sellers of such loans will be able to avoid paying the costs typically associated with home sales, such as broker commissions and closing costs. Generally, we expect that our NPL portfolio may grow at an uneven pace, as opportunities to acquire NPLs may be irregularly timed and may involve large portfolios of loans, and the timing and extent of our success in acquiring such loans cannot be predicted.

Home Stabilization

Before an acquired home becomes an income-producing asset, we must take possession of the home and renovate, market and lease the home in order to secure a resident. The acquisition of homes involves the outlay of capital beyond payment of the purchase price, including payments for property inspections, closing costs, title insurance, transfer taxes, recording fees, broker commissions, property taxes and HOA fees in arrears. The time and cost involved in stabilizing our newly acquired homes will affect our financial performance and will be affected by the time it takes for us to take possession of the home, the time involved and cost incurred for renovations and time needed for leasing the home for rental.

Possession can be delayed by factors such as the exercise of applicable statutory or recession rights by hold-over owners or unauthorized occupants living in the home at the time of purchase and legal challenges to our ownership. The cost associated with transitioning an occupant from an occupied home varies significantly depending on the steps taken to transition the occupant (i.e., willfully vacate, cash for keys, court-ordered vacancy). In some instances where we have purchased a home that is occupied, our Manager has been able to convert the occupant to a short-term or long-term resident.

We expect to control renovation costs by leveraging our Manager's supplier relationships, as well as those of our Manager's exclusive partners, to negotiate attractive rates on items such as appliances, hardware, paint, and carpeting. Our Manager will also make targeted capital improvements, such as electrical, plumbing, HVAC and roofing work, that we believe will increase resident satisfaction and lower future repair and maintenance costs. The time to renovate a newly acquired home can vary significantly among homes depending on the acquisition channel by which it was acquired and the age and condition of the home. We expect to reduce the time required to complete renovations through our Manager's relationship with what we consider to be best-in-class single-family home renovation companies.

Similarly, the time to market and lease a home will be driven by local demand, our marketing techniques and the supply of homes in the market. We will drive to lower lease-up time for our homes through our Manager's relationships with local brokers and other intermediaries established in the markets where our homes are located, and through the fully-integrated marketing and leasing strategy developed by the members of the Waypoint executive team.

Table of Contents

Based on our prior experience, we anticipate that, on average, for each non-leased home that we acquire, the period from our taking possession to leasing a home will range from 30 to 180 days. We expect that most homes that were not leased at the time of acquisition should be leased within six months thereafter and that homes owned for more than six months provide the best indication of how our portfolio will perform over the long-term. As of June 30, 2014, the 5,909 homes we owned for more than 180 days were approximately 94.9 % leased which excludes 285 Non-Rental Assets. As of June 30, 2014, the 5,545 homes that were rent ready for more than 90 days were approximately 98.8% leased. After taking possession of a home, management expects the home to be leased/occupied within approximately 110 to 130 days.

Loan Resolution Methodologies

We and Prime employ various loan resolution methodologies with respect to our NPLs, including loan modification, collateral resolution and collateral disposition. The manner in which a NPL is resolved will affect the amount and timing of revenue we will receive.

We expect that a portion of our NPLs will be returned to performing status primarily through loan modifications. Once successfully modified, we may consider selling these modified loans.

We believe that a majority of these NPLs will have entered, or may enter into, foreclosure or similar proceedings, ultimately becoming SFR that can be added to our portfolio if they meet our investment criteria or sold through SFR liquidation and short sale processes. The costs we incur associated with converting loans generally include ongoing real estate taxes, insurance and property preservation on the underlying collateral, loan servicing and asset management and legal. We estimate that such costs typically range between $10,000 and $30,000 per foreclosure. The amount of costs incurred is primarily dependent on the length of time it takes to complete the foreclosure. We expect the timeline for these processes to vary significantly, and final resolution could take up to 30 months, but can take as long as three years or more in the most burdensome states with the most difficult foreclosure processes, such as New Jersey and New York (states in which approximately 4% and 5%, respectively, of our NPLs are located as of June 30, 2014 based on purchase price). The variation in timing could result in variations in our revenue recognition and our operating performance from period to period. There are a variety of factors that may inhibit our ability to foreclose upon a loan and get access to the real property within the time frames we model as part of our valuation process. These factors include, without limitation: state foreclosure timelines and deferrals associated therewith (including with respect to litigation); authorized occupants living in the home; federal, state or local legislative action or initiatives designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures and that serve to delay the foreclosure process; programs that require specific procedures to be followed to explore the refinancing of a residential mortgage loan prior to the commencement of a foreclosure proceeding; and declines in real estate values and sustained high levels of unemployment that increase the number of foreclosures and place additional pressure on the already overburdened judicial and administrative systems.

The exact nature of resolution will be dependent on a number of factors that are beyond our control, including borrower actions, home value, and availability of refinancing, interest rates, conditions in the financial markets, regulatory environment and other factors. In addition, we expect that our real estate assets may decline in value in a rising interest rate environment and that our net income could decline in a rising interest rate environment to the extent such real estate assets are financed with floating rate debt and there is no accompanying increase in rates and net operating income.

The state of the real estate market and home prices will determine proceeds from any sale of homes acquired in settlement of loans. Although we generally intend to own as rental properties the assets we acquire upon foreclosure, we may determine to sell such assets if they do not meet our investment criteria. In addition, while we seek to track real estate price trends and estimate the effects of those trends on the valuations of our portfolios of NPLs, future real estate values are subject to influences beyond our control. Generally, rising home prices are expected to positively affect our results of homes acquired in settlement of loans. Conversely, declining home prices are expected to negatively affect our results of homes acquired in settlement of loans.


Our revenue comes primarily from rents collected under lease agreements for our homes. The most important drivers of revenue (aside from portfolio growth) are . . .

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