08/10/2017 | by
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Invitation Homes (NYSE: INVH) said Aug. 10 that it will combine with Starwood Waypoint Homes (NYSE: SFR) in an all-stock deal described by the two single-family rental housing REITs as a “merger of equals.”

Shares of both companies reacted positively to the news. In mid-morning trading, Invitation Homes share prices were 4.9 percent higher from the previous day’s closing price of $22.02. Starwood Waypoint share prices had gained 5.3 percent to $35.41.

Under the terms of the deal, each Starwood Waypoint Homes share of stock will be converted into 1.614 Invitation Homes shares, based on a fixed exchange ratio. Invitation Homes stockholders will own approximately 59 percent of the combined company’s stock, with current Starwood Waypoint Homes stockholders owning the remainder. The company will operate under the name Invitation Homes, and Starwood Waypoint Homes CEO Fred Tuomi will serve as CEO. Bryce Blair, currently chairman of Invitation Homes, will become chairman of the new entity.

The equity market capitalization of the combined company will be approximately $11 billion, based on the Aug. 9 closing share prices for both companies.

In a conference call, Tuomi described the two companies as “pioneers” of the single-family rental space. He stressed that Invitation Homes and Starwood Waypoint Homes are “nearly identical,” with 83 percent of the geographic footprint of their portfolios overlapping. The new company’s portfolio will contain approximately 82,000 single-family homes, located in 17 markets primarily in the Western United States and Florida.

Initial Reaction Positive

Jade Rahmani and Ryan Tomasello, analysts at Keefe, Bruyette & Woods, commented that coupling Invitation Homes’ “local density and boots on the ground” with Starwood Waypoint’s emphasis on technology should help create a “leading, sustainable residential rental platform that over the long term has growth potential within both the single-family rental and broader residential housing markets.”

Citi Research analyst Michael Bilerman pointed out that the combined company will benefit from larger size and scale, geographic market overlap, and operational and general and administrative (G&A) synergies.

In terms of the broader industry implications, the transaction bolsters the scale and operational efficiency of leading players, according to Rahmani and Tomasello. “The transaction, if successful and well-received, could increase the likelihood of additional mergers in the industry,” they said.

Meanwhile, Tuomi noted that although the combined company will be the largest single-family rental company in the U.S., its portfolio still represents just a half percent of the nearly 16 million single-family homes for rent. Less than 2 percent of the nation’s single-family rental homes are institutionally owned, he added.

According to Tuomi, “demographic tailwinds remain at our feet,” as supply and demand fundamentals look favorable for the foreseeable future.

Invitation Homes, founded by private equity firm Blackstone in 2012, raised more than $1.5 billion in an initial public offering (IPO) in January. Following the proposed merger, Blackstone’s ownership stake in the combined company will drop to 41 percent from 70 percent in the current, stand-alone Invitation Homes.

The transaction is expected to close by the end of the year.