Single-Family REIT Starwood Waypoint to Merge with Colony American Homes

Single-family REIT Starwood Waypoint Residential Trust (NYSE: SWAY) and Colony American Homes, Inc. said Sept. 21 they have agreed to merge in a stock-for-stock transaction that will create a combined company with $7.7 billion in assets.

The new company will own and manage more than 30,000 homes and is expected to achieve estimated annualized cost synergies of $40 million to $50 million.

Following the transaction, SWAY shareholders will hold approximately 41 percent of the combined company’s shares, with Colony shareholders holding about 59 percent. The share allocation was determined based on each company’s net asset value.

Fred Tuomi, president and COO of Colony, will serve as CEO. Doug Brien, CEO of SWAY, will serve as president and COO. Arik Prawer, CFO of Colony, will serve as CFO of the combined company. The transaction is expected to close in the first quarter of 2016.

During a conference call, Barry Sternlicht, CEO and chairman of private equity firm Starwood Capital Group, said the single-family sector has “suffered a little bit from investor neglect,” with share prices not reflective of the underlying earnings power or the fair value of the homes. Sternlicht said SWAY and Colony have both been frustrated by this, but knew that increasing scale was the solution.

“This asset class deserves a major position in the REIT industry,” Sternlicht said. He added that the single-family sector offers “equal or better returns than anything we’re looking at today.”

Thomas Barrack, Jr., executive chairman of Colony Capital, Inc., said the merger demonstrates “the power of scale and consolidation and really crystallizes the long-term durability of the single-family rental industry.”

The combined company, according to Sternlicht, will be “accretive right out of the box,” and one of the largest players in the public single-family market.

In terms of geographic presence, the new company will own more than 9,000 homes in Florida, its largest market. “We’re bullish long-term on Florida,” Sternlicht said. Georgia will be the second largest market, followed by Texas and California.

Jade Rahmani, analyst at Keefe, Bruyette & Woods, said the transaction resolves several strategic issues that SWAY has been facing, including scale and its externally managed corporate structure. Under the terms of the deal, SWAY will internalize the existing external REIT manager.

“We believe the merger should position SWAY as a best-in-class single-family rental operator and allow the company to garner interest from institutional investors,” Rahmani said.

For his part, Sternlicht said he saw no reason why the company couldn’t become three times larger.

“Hopefully this transaction will give the company the float to get major institutional investors involved in the asset class, and enjoy what we expect will be a continued growth in the dividend stream, and a very attractive total return,” he added.