Is the NPL Market Too Competitive? Not Yet, Says Starwood Waypoint

OAKLAND, CA—Locally-based Starwood Waypoint Residential Trust has picked up another pool of non-performing loans for $73.3 million. The total purchase price includes 430 NPLs and 81 REO homes.

The $58.7 million total purchase price of the NPLs represents approximately 69.6% of the estimated broker price opinion value of $84.4 million at the time of purchase.

This deal follows Starwood's acquisition in August of two separate pools of nonperforming loans for $218.7 million. That deal consisted of 1,294 nonperforming loans and 146 REO homes.

All told, during the third quarter to date the company has invested $308.7 million to acquire four pools consisting of 1,800 NPLs and over 300 REO homes.

This most recent transaction was complex, requiring Starwood to collapse the seller's securitization, pay off two mezzanine notes and partially pay down the seller's debt facility.

Nonetheless its relatively smaller size begs the question of whether the NPL loan market is getting too competitive. This was an issue addressed last month during the company's earnings call. The answer, in short, was yes the market was getting increasingly competitive – but Starwood plans to stay with it.

"We plan to stay close to this market, and come in and out, as opportunities present themselves," Doug Brien, co-CEO said during the call.

He pointed to research from John Burns, which found that the number of NPLs in excess of the 20-year average is about $1.7 million, and the top nine banks alone have over $100 billion in NPLs, leading Starwood to conclude there is at least several more years of opportunity.

"We like the business," Brien said. "We have the infrastructure to underwrite and manage large loan pools, and Starwood Capital provides SWAY with proprietary deal flow to help us buy at attractive prices."

The company's NPL book is performing, according to its recent earnings report. It is estimating current NPL pools are achieving a midteen unlevered IRR, and an equity multiple of between 1.2 and 1.3. There is also nearly $100 million in UPB of re-performing loans on the books that are generating high single-digit unlevered returns, according to Brien.