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Invitation, Starwood Slate ‘Merger of Equals’ in Single-Family Rentals

Combined Portfolio will Near 82,000 Homes

By Cameron McIntosh | Friday, September 8, 2017

 

Invitation Homes Inc. and Starwood Waypoint Homes, two of the largest single-family rental landlords in the U.S., have agreed to combine in a $4.3 billion deal called a “merger of equals.” 

Once finalized, the combined entity will have a portfolio that encompasses nearly 82,000 single-family rental homes across primarily Sunbelt, West Coast and Florida metros, averaging 4,800 homes per market. With a market capitalization of $11 billion and a total value of roughly $20 billion, including debt, the combined firm would be larger than some conventional apartment REITs. It would unequivocally establish the single-family owner-operator as the largest publicly traded real estate investment trust of its kind.

             

This Invitation-Starwood deal signals a doubling down on Wall Street’s stance that consumers are likely to remain renters longer rather than homeowners. But does opportunity in the single-family rental market come at the cost of the apartment market? Not likely. The trade-off in housing demand appears to be between single-family rentals and single-family purchase, not single-family rentals and conventional apartment rentals.

The homeownership rate has declined to near 50-year lows in spots across the nation. The national rate registered at 63.7% as of the second quarter off 2017, still down meaningfully from the roughly 69% rate seen before 2008. Meanwhile, there were more renter households in the U.S. in 2016 than at any other point since at least 1965, according to a recent Pew Research Center study. Demographic trends suggest the shift toward rentership will continue.

Individually, Invitation Homes and Starwood Waypoint Homes focused on supplying single-family rentals to those who prefer a suburban lifestyle but either could not or did not want to own a home in the suburbs – a strategy to accommodate working families. In the conventional apartment market, however, working families represent less than 6% of renter households, according to an analysis of leases executed through RealPage software.

“Household composition is the biggest factor influencing the choice between apartment and single-family home living,” said Greg Willett, chief economist for RealPage. “While finances and lifestyle preferences come into play in housing selection, simple demographics serve as the starting point.”

Additionally, investment-grade conventional apartment rentals are generally more affordable than investment-grade single-family rentals. Invitation Homes posted an average monthly rental rate of $1,683 as of the second quarter of 2017, topping Starwood’s monthly rent of $1,629, according to its most recent quarterly report.

Meanwhile, rent on a two-bedroom apartment averaged $1,296 across the nation’s 100 largest metros, while three-bedroom units averaged $1,517 as of the second quarter, according to RealPage.

On a joint conference call with Invitation Homes discussing the deal, Starwood CEO Frederic Tuomi noted that, “Over the last five years, the institutional single-family rental business has grown from a unique investment opportunity to a stable business with a very promising future.” Since the recession, single-family landlords have turned to combining with competitors in order to gain scale and to fine-tune their operations, particularly as property values continue to appreciate and the pool of foreclosed properties becomes increasingly limited. Business consolidation for the sake of gaining geographic and technological economies of scale, and the additional synergies that could manifest, will likely remain a key growth strategy going forward.

The merging of the Invitation Homes and Starwood portfolios has become particularly important as it represents another milestone in the development and, as Tuomi put it, “professionalization” of this traditionally mom-and-pop business, a move that continues the trend of consolidation.

 

Cameron McIntosh

Cameron McIntosh

Research Analyst

Cameron McIntosh is a Market Analyst for RealPage, Inc. Prior to joining RealPage, he worked in the financial services and commercial real estate industries, specializing in intermediate market advisory services and investment strategy. He holds a bachelors in finance and economics from the University of North Carolina Wilmington.

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