Invitation Homes and Starwood create $11bn single-family rental REIT

Invitation Homes, the single-family-rental property owner created by Blackstone, is to merge with competitor Starwood Waypoint Homes, creating a $11bn (€9.53bn) real estate investment trust (REIT).

The creation of the largest single-family-rental REIT highlights how the sector is becoming a major institutional asset class as US home ownership remained out of reach for many since the global financial crisis.

The deal combines two of the largest owners and operators of single-family homes in the US to create a single landlord for approximately 82,000 homes in 17 metropolitan areas, with heavy concentrations in and around Atlanta, Miami, Tampa Bay and Southern California.

The scale of the Invitation Homes transaction marks a turning point for the sector, which had initially been seen as an opportunistic investment to be exited when homeownership rates rebounded.

The combined company will retain the Invitation Homes name and rank as the largest private owner of single-family homes, surpassing American Homes 4 Rent, which owns about 49,000.

Invitation Homes shareholders will own 59% of the combined company’s shares while Starwood’s investors will hold the remaining 41%.

According to the transaction announcement, the equity market capitalisation of the combined company would be approximately $11bn and the total enterprise value including debt would be approximately $20bn based on 9 August stock prices.

Blackstone held 71% of Invitation Homes’ equity after an initial public offering in January, and will own approximately 41% of the equity of the combined company.

Starwood Waypoint’s CEO Fred Tuomi will take the top job at the combined company, and the board will be comprised of six directors from Invitation Homes, including Blackstone property group head Jonathan Gray, and five from Starwood, including chairman Barry Sternlicht.

“This merger creates the leading single-family-rental company in the US, which will be uniquely positioned to deliver exceptional service to residents, while also improving operating efficiency,” said Tuomi.

The transaction continues the consolidation trend in the rmarket, where single-family homes are increasingly owned by private investors that rent the properties.

Institutional investors have been steadily acquiring larger groups of single-family homes since the financial crisis, initially buying up foreclosed units, and subsequently bidding for blocks of houses in areas where they could achieve cost efficiencies in leasing, maintenance and other operations.

The single-family-rental business fills a need for professionally managed homes in areas outside urban cores filled by multifamily properties, said Calvin Schnure, economist at the National Association of Real Estate Investment Trusts (NAREIT).

Single-family REITs “help fill an important role in US housing markets overall”, he said. “Millions of American families desire the extra space of a single-family home, as well as the access to schools and suburban neighbourhoods that are difficult to find in apartment rentals – yet prefer renting to home ownership. This includes many for whom a home purchase is financially out of reach.”

No longer a short-term opportunity

The scale of the Invitation Homes transaction marks a turning point for the sector, which had initially been seen as an opportunistic investment to be exited when homeownership rates rebounded. But homeownership in the US declined sharply after the crisis and remains below 2008 levels, despite a slight increase in the past two years.

According to Morgan Stanley, 5.8m households have been formed since the financial crisis, but there are still 1m fewer owner households than there were in 2008. 

While the trend is good news for rental-housing investors in general, the single-family sector stands to benefit. In a recent report, Morgan Stanley said: “We believe single-family rental and multifamily can coexist as they have for many years and will both benefit from strong industry tailwinds, but we prefer [single-family] REITs over the near to medium term.”

The recent income performance of single-family REITs has stood out in the current low-yield environment. Schnure said they had “demonstrated careful attention to cost control and ability to grow rents”. He added: “The sector paid nearly $200m in dividends in 2016 and recorded growth of same-store net-operating income [NOI] in the high single-digits to low double-digits over the past two years.”

According to Invitation Homes and Starwood Waypoint Homes, the combined company is experiencing a 7% pro-forma same-store NOI growth in Q2 2017 with over 95% occupancy. The two companies have invested nearly $2bn – an average of approximately $22,000 per home – in renovations and maintenance, and improving residents’ experiences.

The overall value of single-family, detached housing in the US is nearly $25trn, and single-family-rental units account for about $3.1trn of that, according to Amherst capital Management. Single-family rentals account for approximately 13% of all occupied housing in the US, but institutions own only about 200,000 units.

A report by Amherst said: “Single-family rentals are not a new phenomenon. What is new is institutional ownership of single-family rentals.”

Despite being the largest single-family-rental landlord, the new Invitation-Starwood company will represent less than 0.1% of the more than 90m single-family homes in the country – and just 0.5% of the nearly 16m single-family homes for rent.

“The [market value] of single-family rentals is comparable to other big income-generating [commercial real estate] sectors,” said Amherst. But institutions “are still a tiny part of the market”.

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